The current weekly rate of Statutory Maternity Pay is £140.98 (or 90% of the employee’s average weekly earnings if this figure is less than the statutory rate). The rate of Statutory Maternity Pay is rising to £145.18 on the first Sunday in April, which in 2018 is 1st April.
Also on 1st April 2018, the rates of Statutory Paternity Pay and Statutory Shared Parental Pay will also increase from £140.98 to £145.18 (or 90% of the employee’s average weekly earnings if this figure is less than the statutory rate).
The rate of Statutory Adoption Pay also increases to £145.18. This means that, from 1st April 2018, Statutory Adoption Pay is payable at 90% of the employee’s average weekly earnings for the first six weeks, with the rest of the adoption pay period at the rate of £145.18, or 90% of average weekly earnings if this is less than £145.18.
The Government will increase the National Living wage (NLW), which applies to workers aged 25 and over, by 4.4% from £7.50 to £7.83 per hour.
At the same time, the National Minimum Wage (NMW) rates will be increased as follows:
- from £7.05 to £7.38 per hour for 21 to 24 year olds;
- from £5.60 to £5.90 per hour for 18 to 20 year olds;
- from £4.05 to £4.20 per hour for 16 and 17 year olds; and
- from £3.50 to £3.70 per hour for apprentices;
What you must do:
If you employ people on these rates, review what you can do to limit the impact.
If you employ people on just above the living wage, then consider whether your reward strategy will remain competitive, and what you are going to do about it.
Do not try to avoid payment; the financial and PR consequences are substantial.
If applicable, communicate with your staff the impact on their pay, and consult over ways to improve productivity.
Termination and Settlement Payments
From 6th April 2018, termination payments made ‘in lieu of notice’ will be taxed at the employee’s highest rate of income tax. The statutory element of a redundancy package – i.e.: the part that an employer is required to make by law – will remain tax-free. However, another common element of many termination payments, the payment in lieu of notice, will be hit with both income tax and National Insurance.
This is part of a HM Revenue and Customs (HMRC) drive to align tax and NI, so that whenever an income tax payment is made, NI will also be payable. For many employees, it is the payment in lieu of notice that makes up a big proportion of their termination package, and so this is an important change. The current position is that no NI contributions are paid on termination payments where £30k has been paid free of tax. This can amount to a significant cost saving, particularly for employers.
The legislation requires the employer to identify the amount of basic pay that the employee would have received if they had worked their notice period, even if the employee leaves the employment part way through their notice period, or do not work any of it. This amount will, in future, be treated as earnings and will no longer be subject to the £30,000 exemption. All other parts of the termination payment, e.g. compensation for loss of office, will be included within the scope of the £30,000 termination payments exemption. Employers will also be required to pay NICs on any part of a termination payment that exceeds the £30,000 threshold.
It is anticipated that this will be collected in ‘real-time’, as part of the employer’s standard weekly or monthly payroll returns and remittances to (HMRC). HMRC will add the redundancy payment to a worker’s annual earnings in order to calculate how much tax is payable. The worker will then pay tax at their highest rate. This means that redundancy payments will tip many lower paid workers into a higher tax bracket, meaning that they may be paying 40% or even 45% tax plus NICs at 13.8% on a payment that has historically been paid tax free.
According to the HMRC; this measure is intended to bring fairness and clarity to the taxation of termination payments by making it clear that all Pay in Lieu of Notice (PILON), rather than just contractual PILONs, are taxable earnings. All employees will pay tax and Class 1 NICs on the amount of basic pay that they would have received if they had worked their notice in full, even if they are not paid a contractual PILON. This means the tax and NICs consequences are the same for everyone and it is no longer dependent on how the employment contract is drafted, or whether payments are structured in some other form, such as damages.
The distinction between the different types of payments in lieu of notice will be removed. In broad terms, the basic pay that the employee would have received had they worked out their notice is subject to tax and NI in full, irrespective of whether there is a clause in the employment contract giving the employer the right to terminate the employee’s employment by making a payment in lieu of notice (PILON). Any payment that the HMRC deems to be in respect of notice must be taxed, so the old distinctions between contracts with and those without a PILON clause will go. Unless it is very clear that someone has been paid (and taxed etc.) during a period of notice then it is likely that the HMRC will expect payments, which reflect notice period, to be taxed. Hiding it within broad wording about payments being ex gratia, or all inclusive, are very unlikely to be effective. Basic pay for these purposes is the employee’s pay in the period immediately prior to the date on which notice is given or, if no notice is given, the date the employment terminates. Basic pay excludes overtime, bonus, commission, allowances, share and share option gains and benefits in kind.
Employers, but not employees, will have to start making NI contributions. The existing NIC exemption for employees will be retained, even if the payment exceeds £30,000. The Government has said that employees will continue to benefit from an unlimited employee NICs exemption to ensure that those who lose their job will be supported through the tax system.
The ‘disability exemption’ will expressly not apply to compensation for injured feelings, unless the injured feelings amount to a psychiatric injury. This provides a 100% tax exemption for termination payments made only on account of the employee’s disability or injury where it prevents them from carrying out their job. Given that we have never sought to apply this exemption, it is unlikely to be much of a loss to anyone.
Those employers whose employment contracts do not contain PILON clauses should now consider revising them, and inserting contractual PILONs. Paying notice monies in damages (compensation for loss of office or injury to feelings) will cease to be tax efficient and means that the employee stops being bound by on-going contractual obligations such as post-termination restrictive covenants. Dismissing with a contractual PILON clause means that there is no breach of contract so the employee cannot claim that the employer’s breach of contract releases them from any remaining obligations such as restraints on working for rivals, confidentiality, intellectual property protection or that the dismissal was wrongful as it has been lawfully terminated. Further, a contractual PILON payment can be limited to basic salary only, whereas a damages payment should include loss of benefits (including pension contributions, bonus payments, and the cost to the employee of replacing insurances, such as private medical insurance). Doing a payment with a contractual PILON clause will therefore save the employer money.
Employers will need to factor in these additional tax and NI costs in their settlement negotiations. Making all PILONs taxable (whether or not they are contractual) simplifies matters, but it will disadvantage employers who are negotiating termination packages. Employers who plan to make substantial termination payments in the first half of 2018 need to think carefully when those payments are made in order to beat the April date.
Unfortunately the Government has not announced what the new statutory redundancy payments will be post April 2018, but we thought it as well to communicate the above information as soon as we could.
We have written in the past about holiday pay, mainly from the perspective of how commission and regular holiday pay ought to reflect normal earnings, so that employees are not dissuaded from taking holidays. There is no April change on this issue, but something significant has changed which will worry some employers. In November 2017, the ECJ handed down their Judgment in the case of Mr C. King –v- The Sash Window Workshop Ltd.
The ECJ held that a worker must be able to carry over and accumulate unexercised rights to paid annual leave when an employer does not put that worker in a position in which he/she is able to exercise his/her right to paid annual leave. Whilst this case was predominantly about unpaid holiday, it has two potentially major impacts because of the way that it opens up the timescale for back payments.
- Workers who employers might classify as self employed, or as contractors can now claim unpaid backdated holiday pay for an almost unlimited time, i.e. back to 1998. We have highlighted before the risks of not paying holiday pay to such people, but on the previous understanding that there would be a limited cap on how far back such people can go in recovering unpaid holiday pay.
- The other ‘at risk’ group are employers who have chosen not to address the issue of payment for regular overtime or commission payments, despite the case law which has gone, and in some cases, is still going through the courts.
So why is this much bigger concern now? The ECJ have decided that preventing a worker from taking paid holiday is a breach of EU rights, and these rights should not be curtailed by a national law. An employer who seeks to prevent a worker from taking annual leave must bear the consequences of that, and should not benefit from a provision which limits carry over of holiday. Workers bringing such a claim can carry over and accumulate paid annual leave rights, without being subject to any cap. The previous understandings from case law said 15 -18 months in cases of long term sickness.
In the UK, we still have two protections:
- The Regulations which prevent workers looking back more than 2 years where holiday pay has been underpaid (rather than not paid at all); and
- The case law which indicates that a claim in respect of underpaid holiday pay will be time barred where there is a longer than 3 month gap between underpayments;
This judgment clearly opens the door to a legal challenge to both of these protections as being incompatible with EU law. Such a challenge is likely to succeed.
Organisations that use self-employed contractors should re-examine their arrangements to ensure that employment status risks are minimised, including considering reclassification to worker or employee status, and adopting alternative models of engaging consultants, e.g. outsourcing and use of agency workers. Employers should also be re-considering their approach to holiday pay, as the penalties for being wrong at some stage could be huge. The Government (with the tacit support of the TUC) sought to limit the potential for huge claims which might force people out of business, but this can no longer be relied upon.
The guidance provided in this article is just that – guidance. Before taking any action make sure that you know what you are doing, or call us for a free initial chat on 01480 677980.