Employment tax update - December 2023

06 December 2023

This bulletin follows the Government’s Autumn Statement and the release of HMRC's November Agent Update.

Following the Autumn Statement, we thought it would be helpful to summarise changes to the Government’s tax strategy that will impact both employed and self-employed individuals.

IR35 – legislation to offset PAYE liabilities for "deemed employees" against taxes already paid

  • After an HMRC consultation, changes to the IR35 legislation have been announced which will allow contractors to offset any taxes already paid or assessed in relation to an engagement against any PAYE liability that may arise in cases where HRMC deem the contractor to be employed.
  • The legislation will be brought in as part of the Autumn Finance Bill 2023 and will apply to deemed direct payments made on or after 6 April 2017.

NICs – changes to Class 1, Class 2 and Class 4 National Insurance Contributions

  • The main rate of Class 1 NICs for income up to £50,270 is to be reduced from 12% to 10%. The upper rate of 2% for income above £50,270 remains unchanged. This reduction will only impact employed individuals and will take effect from 6 January 2024.
  • The requirement to pay Class 2 NICs (payable by self-employed individuals only) is to be removed from 6 April 2024. This change should not affect self-employed individuals’ entitlements to state benefits.
  • The main rate of Class 4 NICs for profits up to £50,270 is to be reduced from 9% to 8%. As with Class 1 NICs, the upper rate of Class 4 NICs of 2% remains unchanged. This reduction will only impact self-employed individuals and will take effect from 6 April 2024.

Changes to how penalties are levied for those who join Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA)

  • HMRC have published a policy paper setting out a fairer, points-based sanctions system for late submission of self-assessment returns and more proportionate penalties for late payment of tax liabilities.
  • This measure will affect taxpayers who voluntarily join the MTD for ITSA service and their representatives, and who fail to submit returns on time or fail to pay tax on time.
  • These changes will take effect from 6 April 2024, with the first penalties potentially applied to annual tax filing obligations due in January 2026.
  • Under the new regime, when a taxpayer misses an annual self-assessment submission deadline they will incur a penalty point. If a taxpayer incurs two points (i.e. they miss two annual submission deadlines) a fixed financial penalty of £200 will be levied.
  • The taxpayer may also incur costs based on late payment of tax. The new late payment penalty will consist of two separate charges: the first charge will become payable 30 days after the payment due date and will be based on a percentage of the balance outstanding, and the second will become payable from day 31 and will accrue daily, based on the sum outstanding.

Self-assessment employment income threshold changes

  • Just six months after HMRC announced an increase in the self-assessment employment income threshold from £100,000 to £150,000 for the 2023/24 tax year, the Government announced through the Autumn Statement that, for the 2024/25 tax year and beyond, the threshold will be removed completely.
  • This means that, from 2024/25, employees with employment income taxed through PAYE in excess of £150,000 will not need to file a self-assessment tax return where they have no other sources of reportable income or gains. HMRC estimate that this will remove the requirement to file a return for up to 338,000 people.

Tax advantaged share/investment schemes

  • Legislation will be introduced in the Autumn Finance Bill 2023 to extend the existing sunset clauses for the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) schemes from 6 April 2025 to 6 April 2035. This will continue the availability of income tax and CGT reliefs for investors in new shares issued before that date by EIS qualifying companies and VCTs.
  • Legislation is also being introduced to extend the time limit to notify HMRC of a grant of Enterprise Management Incentives (EMI) options from 92 days following the date of the grant to 6 July following the end of the tax year in which the grant was made. This change will only apply to EMI options granted from 6 April 2024.

As with our previous Employment tax updates, we have also summarised the content most relevant to employment taxes and reward activities from this month’s HMRC Agent Update, Issue 114.

"Relevant motoring expenditure" and National Insurance Contributions (NICs)

  • In a recent decision of the Upper Tribunal (UT), the definition of the types of payments that constitute "relevant motoring expenditure" has been broadened to include payments in respect of potential and anticipated use of a vehicle.
  • This decision means that relief from income tax and Class 1 NICs will now be available when employees receive payments in respect of not just actual use, but also potential and anticipated use of their own vehicle for business journeys (not including ordinary commuting). This will specifically affect those who receive fixed sum car allowance payments.
  • Where NICs have been paid on car allowance payments made in previous periods, a refund for the overpaid contributions may be claimed by both employers and employees. For claims to be successful evidence should be provided to quantify the business mileage that has been driven.
  • HMRCs usual process for claiming NICs refunds will apply. You can read the guidance on claiming a National Insurance refund for more information.
  • No NICs relief is available on payments made via salary sacrifice arrangements, even if the payments would otherwise be within the definition of "relevant motoring expenditure".
  • HMRC guidance is being updated to reflect the UT’s decision.

Electric charging of company cars and vans at residential properties

  • HMRC has published amended guidance and introduced new guidance about a change in home charging of electric vehicles.
  • Previously HMRC considered that the reimbursement of costs relating to charging a company car or van at a residential property was a taxable benefit.
  • They have since reviewed this position and now accept that reimbursing part of a domestic energy bill, which is used to charge a company car or van, will fall within the exemption provided by section 239 ITEPA 2003. This means that no separate charge to tax under the benefits code will arise where an employer reimburses the employee for the cost of electricity to charge their company car or van at home. 
  • The exemption will only apply if it can be demonstrated that the electricity was used to charge the company car or van. It is recommended therefore that instances of vehicles being charged at home are recorded (with such records being kept for evidencing purposes).

Self-assessment deadline reminder

  • HMRC have issued a reminder of the upcoming self-assessment return deadline on 31 January 2024. Customers do not need to wait until the deadline to file their return and can submit their return early and make payment of their tax liability at a later date (so long as payment is still made before the deadline). 
  • HMRC have also issued a warning for self-assessment customers to watch out for scam texts, emails and phone calls from fraudsters. Unexpected contacts which offer a rebate, tell customers that they need to update their tax details or threaten immediate arrest for tax evasion should be reported as a suspicious communication to HMRC. Relevant HMRC contact details can be found in a recent press release.

Overlap Relief – preparing for the new tax year basis

  • As mentioned in our November Employment tax update, HMRC have released a new online form to submit requests for information on the overlap relief available for taxpayers. As a reminder, HMRC will only be able to confirm the amount of Overlap Relief available if the relevant information for calculating the relief is recorded in their systems (i.e. it has been submitted in previous tax returns) or historic profit figures are shared with HMRC.
  • To help people understand the changes to the new tax year basis, HMRC have recorded a webinar on basis period reform.