Employment tax update - February 2025

This bulletin follows the release of the February Agent Update (Issue 128). In this issue we cover the content most relevant to employment taxes and reward activities.

Changes to the official rate of interest from 6 April 2025

• As noted in our November employment tax update, the official rate of interest (ORI), which is used to calculate the income tax charge on employment-related loans and living accommodation benefits, may increase or decrease from 6 April 2025. 
• Agents and their clients will need to keep an eye on any future ORI changes. The changes to the rate may impact the taxable value of the benefits and care should be taken in calculating the taxable amount where clients choose to voluntarily payroll these benefits going forward. 

Changes to employer National Insurance

• From 6 April 2025, employer national insurance contributions (NICs) will increase from 13.8% to 15%. This rate increase will apply to: 
  • Class 1 secondary NICs payable on earnings from employment; and 
  • Class 1A and 1B NICs payable on expenses and benefits provided to employees. 
• The threshold at which employers will start paying employer Class 1 secondary NICs will decrease from £9,100 to £5,000. 
• These changes will be incorporated into existing payroll software for clients who already report PAYE. 
• More employers will be eligible to utilise employment allowance (EA) to reduce their overall employer Class 1 NICs bill for the tax year. The EA is currently restricted to employers with an employer Class 1 NICs bill of less than £100,000 for the previous tax year. 
• From 6 April 2025, the £100,000 will be removed and the maximum EA will be increased from £5,000 to £10,500.

Expanding the scope of cash basis accounting

• From 6 April 2024, changes to the cash basis were introduced which make it easier for businesses to use it. The cash basis was previously restricted in the following ways:
  • unincorporated businesses with an upper turnover limit exceeding £300,000 had to leave the cash basis;
  • interest and finance cost deductions were limited to £500; and
  • sideways loss relief was not allowed, meaning a cash basis loss could not be set against other income in the current or previous tax year. 
• These restrictions have been removed from 2024/25 going forward and should not feature in tax returns for the 2024/25 tax year (due by 31 January 2026). 
• If businesses wish to use traditional accruals accounting, or they are excluded from using the cash basis (for example, partners in a limited liability partnerships), they will need to opt out of the cash basis when submitting their 2024/25 and subsequent self-assessment tax returns. 
• These changes only apply to the cash basis for trading income. No changes are being made to the cash basis for property businesses. 

Managed Service Companies – new guidance

• The Managed Service Companies (MSCs) legislation tackles tax avoidance through mass-marketed company arrangements through which workers provide their services. 
• The rules prevent the underpayment of income tax and NICs. 
• In November 2024, HMRC published Spotlight 67 on MSCs to help customers identify and understand MSC arrangements. 
• Further guidance on MSCs can be found in the Employment Status Manual and Managed Service Company legislation (Spotlight 32). 

Basis period reform – reporting on a tax year basis

• Individuals who applied to HMRC to request an overlap relief figure on or before the self-assessment tax return filing deadline of 31 January 2025 using HMRC’s overlap relief figure tool but did not receive a response and have still not filed the return, still have until 28 February 2025 to file it with a provisional figure (or final figure if known). 
• Individuals will not incur a late filing penalty, although interest will still accrue from 1 February 2025 on outstanding amounts of tax.
• The return should then be amended once the final figure is known – the general time limit for amendments to a self-assessment tax return is within 12 months of the normal due date. 
• Guidance on how to amend the return can be found on GOV.UK.

Statutory neonatal care leave and pay

• The Government intends to introduce a new statutory entitlement to neonatal care leave and pay from 6 April 2025. 
• This will provide employed parents whose babies are admitted to neonatal care with a day-one employment right to take up to 12 weeks off work, depending on the length of time their baby is in neonatal care. Eligible parents will also be entitled to up to 12 weeks of statutory pay. 
• The regulations to implement this right have already been laid down and, subject to Parliamentary agreement, will apply to babies born from 6 April 2025. 
• The share incentive plan (SIP) legislation will be amended to reflect the introduction of statutory neonatal care pay. The SIP legislation requires an employer to provide notice to inform employees of the possible effect of deductions from salary on entitlement to e.g., social security benefits, when entering into a partnership share agreement. The proposed amendment will include statutory neonatal care pay in the list of statutory payments that must be included in the notice to employees. 
• Further information on the eligibility for and entitlements to neonatal care leave and pay can be found on GOV.UK.

Increase to the limits to be treated as medium or large for the “off-payroll worker” rules

• Under anti-avoidance rules commonly referred to as “IR35”, companies that are treated as “medium or large” are required to meet certain obligations, including a requirement to determine the employment status of contractors who provide services through personal companies (and certain other intermediaries). Where the contractor is effectively operating in a manner akin to an employee, payments for their services must be processed via payroll, and subject to PAYE and NICs.
• From 6 April 2025, the thresholds to be treated as “medium or large” are increasing, as follows.
• Turnover of at least £15m (increased from £10.2m).
• Balance sheet total of at least £7.5m (increased from £5.1m).
• At least 50 employees.
• As was the case previously, at least two of these three conditions must be met in order to be treated as “medium or large”.
• The other IR35 rules remain unchanged. Very broadly, businesses should be aware of the following.
  • Where a consultant provides services to an “end user” via an intermediary entity.
    • If the end user is medium or large, that end user is required to make an employment status assessment and operate payroll where applicable.
    • If the end user is small, the consultant (/their intermediary) is required to make an employment status assessment.
  • Where a consultant provides services on a personal basis (i.e. as a sole trader), the end user is required to make an employment status assessment and operate payroll where applicable.