Category: PAYE

DMS Posts, PAYE, Tax

Sunak aligns NIC and income tax in Spring Statement

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The Chancellor is

aligning the class 1 national insurance contributions primary threshold with the personal allowance of £12,570. 

As I predicted it is impossible to implement this change in payrolls run for April 2022, as it takes time to rewrite payroll software, but it will come into force from 6 July 2022. 

Note that the secondary class 1 NIC threshold, where employers start paying class 1 NIC, will not be raised to align with the primary threshold. Employers will pay class 1 NIC at 15.05% on most employees’ salaries above £9,100 from 6 April 2022. Different secondary class 1 NIC thresholds apply for apprentices and freelance employees. 

Self-employed NICs

The Chancellor has gone further than I expected, with plans to align the thresholds where the self-employed start paying class 2 NIC and class 4 NIC, with the personal allowance, but not immediately. 

The class 4 NIC lower profits limit will rise to £11,908 for 2022/23 and then be aligned with the personal allowance of £12,570 from 6 April 2023. This two-step increase is presumably implemented to shadow the delayed rise in class 1 NIC from 6 July 2022.

Class 2 NIC is currently payable once the individual’s profits for the year exceed the small profits threshold of £6,515. This relatively low payment threshold exists to allow self-employed individuals with small profits to build up a contribution record for the state pension and other benefits. 

From 2022/23 the threshold for paying class 2 NIC will be aligned with that for paying Class 4 NIC: £11,908 for 2022/23, then £12,570 for 2023/24. However, this large step up could leave many low-profit traders with no national insurance contributions for many tax years. 

To solve this problem from 6 April 2022 self-employed traders with profits below the lower profits limit will be treated as if they had paid class 2 NIC, but in fact they will make no actual NICs payment.  

The Government has already published a draft National Insurance (Increase of Thresholds) Bill 2022, which will bring these changes into effect. This Bill will be fast-tracked through Parliament.    

Employment allowance 

In a sop to small businesses the employment allowance will rise from £4,000 to £5,000 from 6 April 2022. This allowance can only be claimed by employers that had a class 1 NIC liability of no more than £100,000 in the previous tax year. The increase will allow an eligible employer to pay one extra person on the national minimum wage without having to pay employer’s class 1 NIC.

The detail in the Spring Statement also confirmed that the employment allowance will cover the employers’ liability for the Health and Social Care levy.   

Basic rate cut 

The promised cut in the basic rate of income tax from 20% to 19%, is slated to apply from 6 April 2024, but that is a long way off. As the past month has shown, the world can change significantly in a few weeks, and I wouldn’t like to predict where we will be in the spring of 2024.

In his Mais lecture last month Chancellor Rishi Sunak set out the principles that underpin his tax policy. At the core is a desire to cut taxes, but only where those cuts can be funded, and he restated that belief in his Spring Statement. 

To find out how much the tax cuts are all going to cost you need to dig into the Spring Statement 2022 policy costings document. For example, the increases in NIC thresholds to align with the personal allowance will cost £26.345bn over five years to 2026/27. 

The costings document sets out three additional sources of income for the Treasury:

  • HMRC compliance (tax enquiries): £3.156bn
  • DWP compliance (benefit fraud and error): £2.24bn
  • Student loans (frozen thresholds increased interest): £35.215bn

The conclusion must be that the next generation will be funding today’s tax cuts by paying handsomely in increased student loan repayments.   

Autumn plans 

Perhaps further detail on how the tax and NIC cuts will be funded will be revealed in the Autumn Budget. In Sunak’s 12-page Tax Plan was a vague reference to reforming tax reliefs and allowances and an aspiration to make the tax system “simpler, fairer and more efficient”.

DMS Posts, PAYE, Tax

Changes to the Coronavirus Job Retention Scheme from July 2021

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The Coronavirus Job Retention Scheme has been extended until 30 September 2021 and the level of grant available to employers under the scheme will stay the same until 30 June 2021.

1. Changes to the level of grant from 1 July 2021

From 1 July 2021, the level of grant will be reduced and you will be asked to contribute towards the cost of your furloughed employees’ wages. To be eligible for the grant you must continue to pay your furloughed employees 80% of their wages, up to a cap of £2,500 per month for the time they spend on furlough.

The table below shows the level of government contribution available in the coming months, the required employer contribution and the amount that the employee receives per month where the employee is furloughed 100% of the time.

Wage caps are proportional to the hours not worked.

MayJuneJulyAugustSeptember
Government contribution: wages for hours not worked80% up to £2,50080% up to £2,50070% up to £2,187.5060% up to £1,87560% up to £1,875
Employer contribution: employer National Insurance contributions and pension contributionsYesYesYesYesYes
Employer contribution wages for hours not workedNoNo10% up to £312.5020% up to £62520% up to £625
For hours not worked employee receives80% up to £2,500 per month80% up to £2,500 per month80% up to £2,500 per month80% up to £2,500 per month80% up to £2,500 per month

You can continue to choose to top up your employees’ wages above the 80% total and £2,500 cap for the hours not worked at your own expense.

DMS Posts, PAYE, Tax

Tax and National Insurance rates and bands

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Here are the changes that will come into effect in April 2021:

National Minimum Wage and National Living Wage

Changes will come into effect on 1st April. Note the different age bands for rates in 2021/22.

2021/222020/21
Employees aged under 18: NMW£4.62£4.55
Employees aged 18-20: NMW£6.56£6.45
Employees aged 23 and over: NLW£8.91N/A
Employees aged 25 and over: NLWN/A£8.72
Employees aged 21-24: NMWN/A£8.20
Employees aged 21-22: NMW£8.36N/A

England, Northern Ireland and Wales

Changes will come into effect on 6th April 2021.

2021/222020/21
Personal allowance£12,570£12,500
Employee’s NI becomes due at£9,568£9,500
Employer’s NI becomes due at£8,840£8,788
Higher rate tax becomes due at£50,270£50,000
Class 2 NI becomes due when profits exceed£6,515£6,475
Class 2 NI per week£3.05£3.05
Class 4 NI becomes due when profits exceed£9,568£9,500

Scottish tax rates and bands

Changes will come into effect on 6th April 2021.

2021/222020/21
Personal allowance£0 – £12,570£0 – £12,500
Starter rate 19%£12,571 – £14,667£12,501 – £14,585
Basic rate 20%£14,668 – £25,296£14,586 – £25,158
Intermediate rate 21%£25,297 – £43,662£25,159 – £43,430
Higher rate 41%£43,663 – £150,000£43,431 – £150,000
Top rate 46%Over £150,000Over £150,000

Student Loan repayment thresholds and new Scottish student loan plan

Changes will come into effect on 6th April 2021.

2021/222020/21
Undergraduate loan: plan 1£19,895£19,390
Undergraduate loan: plan 2£27,295£26,575
Scottish student loan: plan 4£25,000N/A
Postgraduate loan£21,000£21,000
DMS Posts, PAYE

What is CEST?

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Definition of CEST

CEST is short for Check Employment Status for Tax. It’s a digital tool designed by HMRC to help public authorities decide if a worker falls inside or outside the scope of IR35.

The tool comes in a quiz-like format and can be accessed here.

Why was CEST introduced?

When off-payroll working rules were introduced to the public sector in 2017, the onus to certify whether a worker fell inside or outside IR35 shifted from the worker to the public sector authority.

HMRC produced the CEST tool to help public sector authorities make these decisions quickly and cheaply.

An updated version of the CEST tool was released in November 2019.

Does CEST only apply to the public sector?

CEST can be used in both the private sector and the public sector but it’s important to note that the private sector is assessed differently under the off-payroll regulations. In the private sector, the onus is on contractors to declare whether they fall inside or outside IR35, rather than their clients.

From April 2021, the rules on off-payroll working in the private sector are set to change, bringing it in line with the rules that apply to the public sector for contractors working with large and medium-sized business clients.

DMS Posts, Other, PAYE, Tax

Inside and outside IR35: What you need to know

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With rules set to change in the private sector from 6 April 2021, it’s important to understand what implications this might have on your contracts and tax bills.

The responsibility for determining your status in the private sector will shift to your client, if they are eligible. If you believe you are outside IR35, you’ll need to ensure your freelance contract and working practices clearly demonstrate your relationship as a contractor.

What’s the difference between inside IR35 and outside IR35?

Your status impacts the employment taxes you will pay.

Inside IR35
  • You pay the same tax and National Insurance as you would if you were an employee. 
  • You are only an employee for tax purposes, you have no employment rights.
  • Your client will be required to pay the necessary tax and NIC, which includes Employers’ NIC and the apprenticeship Levy where applicable.
Outside IR35
  • Nothing changes. You are paid a flat fee as normal and are responsible for managing your own taxes.

How and who pays the appropriate taxes largely depends upon a number of key factors: control over how the work is done, whether your personal service is required and mutuality of obligation. However, how you are set up in business can also be an influencing factor.

Not sure whether your contract is inside or outside?

You can check your employment status for tax using this tool from HMRC

Having a tax specialist review your contract can give you peace of mind. FSB members have access to a contract review service, for an additional fixed fee.

My last contract was outside IR35, but this one is inside?

IR35 applies on a contract by contract basis, so your status may differ depending on the contract agreed.

To remain compliant, you’ll want to brush up on your understanding of the new rules in the private sector.

If you don’t agree with your client’s decision about your employment status the legislation gives you the right to submit a written challenge to the Status Determination Statement and requires the end client to respond within 45 days to further explain their reasoning.