The new tax year begins today and ushers in an unusually large number of changes to income taxes, pensions and dividend taxation. So here is what to expect:
The amount an employee can earn before paying income tax rises from £11,500 to £11,850. This equates to a tax cut of £70 per year for all but the highest earners.
The starting point for paying the 20% basic rate will be £11,850 while the 40% tax rate will start on earnings above £46,350 (up from £45,000).
Class 1 National Insurance contributions (NICs) will be charged at 12% of income on earnings above £8,424, up from £8,164, until earnings exceed £46,350 when the charge drops to 2% of higher earnings.
Minimum contributions to auto-enrolment pensions will increase from 1% to 3% of salary for workers, while the minimum employer contribution rises from 1% to 2%
The bad news for shareholders and investors is that the tax-free dividend allowance decreases from £5,000 to £2,000.
Enterprise Management Incentive (EMI) Schemes
The EU State Aid approval for all EMI schemes expires today. EMI share options granted in the period from 7 April 2018 until EU State Aid approval is received may not be eligible for the tax advantages presently afforded to option holders, and accordingly share options granted in that period as EMI share options may necessarily fall to be treated as non-tax advantaged employment-related securities options.
Companies may wish to consider delaying the grant of employee share options intended to qualify as EMI share options until fresh EU State Aid approval has been given.
Perhaps the biggest shake-up of all relates to the taxation of termination payments and, in particular, to the foreign service exemption and the taxation of payments in lieu of notice (PILONs).
As from today, the foreign service exemption is not available to employees who are UK resident in the tax year their employment is terminated. This change will drastically reduce the use of the relief. As a result, those employees who have worked abroad but are resident in the UK in the year their employment is terminated are, from 6 April 2018, taxed in the same way as others who haven’t worked abroad.
As to the taxation of PILONs, there is now, in practice, largely no difference in the tax treatment between contractual PILONs and non-contractual PILONs. The revised legislation effectively produces a result which ensures all PILONs, whether contractual or non-contractual, are fully taxable and subject to both employee’s and employer’s NICs.
Accordingly, non-contractual PILONs will no longer fall within the exemption at section 403 Income Tax (Earnings and Pensions) Act 2003 and will no longer attract the concession whereby the first £30,000 of such a payment can be paid without deduction of tax.
Although the new regime for the taxation of PILONs means that contractual and non-contractual PILONs will be treated in the same way for tax purposes, this does not affect what happens as a matter of law when an employer terminates a contract of employment summarily and pays a non-contractual PILON to the employee. Such a termination will still amount to a repudiatory breach of contract by the employer and will release the employee from any continuing contractual obligations, such as post-termination restrictions.
It therefore remains the case that employers should think carefully before terminating an employee’s employment by making a non-contractual PILON.