The UK Government, in its first budget as a fully conservative government, announced last month that they will be introducing a National Living Wage of £7.20 per hour in April 2016 for all working people aged 25 and over.
The National Living Wage will be compulsory for employers. Currently employers can voluntarily pay the ‘Living Wage’ set by the Living Wage Foundation. The Low Pay Commission will review the National Living Wage and be asked to recommend future rises. The Government is aiming for an hourly rate of £9.00 by 2020 – being 60% of median earnings.
The national minimum wage currently stands at £6.50 per hour, rising to £6.70 in October 2015. For those aged 25 or over, their hourly rate will rise to £7.20 in April 2016 which will be an 11% increase on the current mandatory pay rate.
How this will impact on businesses is not clear. It is likely to impact those businesses with a high number of employees (if not all employees) on the national minimum wage. The Government have stated that they will reduce corporation tax and increase employment allowance to help businesses and reduce the additional burden.
On 24th July 2015, the Government (HMRC) also launched a consultation on the simplification of the Tax and National Insurance Treatment of Termination payments. Currently, the first £30,000 of any non-contractual termination payment is free of tax and national insurance. The Governments proposals stem from reports into the current system which concluded that the current system is full of confusion and uncertainty. The Government want a system that is fairer, easy to administer for employers and easy to understand for employees.
The government’s aim is to reform termination payments so that they meet the following criteria:
- the new system must be simple for employers and employees to understand;
- it must provide certainty for employees about what the tax and NICs treatment is so that there is no additional distress at what is already a difficult time;
- the tax and NICs treatment must be easy for employers and HMRC to administer;
- the tax and NICs treatment must be fair, so that those who are better paid and better advised (because they are able to afford to pay for advice) do not receive a more favourable tax and NICs treatment than those who are lower paid; and
- it must be affordable for the Exchequer.
To achieve this the Government are considering:
- removing the distinction between contractual and non-contractual termination payments (for example a pay in lieu of notice payment (PILON) would also attract tax-free status)
- aligning the income tax and NICS treatment of termination payments
- reforming the tax and NICs exemption of a fixed £30,000 tax-free sum to an amount which increases proportionately with the number of years of service the employee has completed.
- introducing a two year qualifying period – this would mean that an employee would only qualify for the exemption if they have completed two years’ of service. Anyone who receives a termination payment after two years of service would not have to pay tax or NICs on some, or possibly all, of their payment (depending on the size of the payment)
- the level of the tax and NICs exemption would then increase at a set rate with each year of service completed up to a maximum amount.
- making injury to feelings awards subject to tax for some or all of the award.
- introducing new exemptions for wrongful or unfair dismissal compensation and all compensation relating to discrimination.
The Government’s proposals have been heavily criticised and many feel they have not been well thought out. The system proposed appears to be more confusing with the possibility of more exemptions than originally intended and tax being due on injury to feelings awards when they have long been treated as tax-free payments. The consultation closes on 16 October 2015, so it will be a while before we know about the findings of the consultation and what changes to the current system the Government will implement. We will keep you up-dated on any developments.