Employment tax: reflections on 2021 and its impact for employers

As 2021 draws to a close, it is a good point to reflect on the last twelve months from an employment tax perspective, to take stock and start to think about the coming year.

The two key themes of 2021 for employers that stand out are an increased employment tax compliance burden and increasing costs.

Alongside managing pandemic-related compliance issues such as the government’s Coronavirus Job Retention Scheme, employers have had to grapple with some big changes during the year, some of which are likely to affect employers and employees well into next year and beyond.

In this article, employment tax expert Lee McIntyre-Hamilton highlights some key elements from the past year that underpin these themes, what they mean for employers and employees, and what actions may be required.

IR35 overhauled

In the early part of the year, the first big change in employment tax was the overhaul of IR35. For the first time since its inception in 2000, responsibility for assessing and operating PAYE and NIC passed from a contractor’s personal service company to their client (i.e. the engaging company).

Applying from 6 April 2021, this major change means that any UK organisation deemed ‘medium’ or ‘large’ under HMRC rules is required to determine the employment status for existing and new contractors and is obliged to provide a formal determination statement (“Status Determination Statement”) to contractors with whom they engage. Where contractors are deemed to be employees under the rules, then organisations are obliged to operate PAYE and NIC.

Whilst these changes had been expected (they were postponed from 2020), many employers have still yet to fully understand what they mean. This is not surprising as employment status is based largely on case law and can be difficult to determine accurately and, of course, employers have had a great many other pandemic-related issues to contend with.

Over the coming year, we are likely to see an increase in HMRC investigations into this area and so employers should turn their attention to this, if they have not done so already. Penalties and interest can quickly rack up for non-compliance, particularly where organisations engage multiple contractors.

The end of furlough (for now?)

The Coronavirus Job Retention Scheme provided a substantial financial boost to employers and employees during 2021. Without the scheme, it is likely that we would have seen a significant increase in unemployment and many businesses would simply have perished. However, it undoubtedly placed a significant additional strain on already stretched HR and payroll departments, with perpetual government rule changes (some estimate over 200) and difficult guidance to wade through.

Whilst the scheme ended on 30 September, we are unlikely to see the back of it just yet. Firstly, it is quite possible in these uncertain times that it will be re-introduced for a limited period in the event of any further lockdowns. Even if this does not happen, employers will very likely see a substantial increase in enquiries and investigations in 2022, with HMRC estimating that several billion pounds have been lost to the exchequer through fraud and error.

Given this, it would be wise for employers to review their claims now for accuracy, both to identify any errors and make provision for them where necessary and so that penalties and interest can potentially be minimised by voluntarily disclosing the position to HMRC.

NIC increases and the social care levy

Alongside the increased compliance burden, increasing employment costs were also announced this year during the Chancellor’s Autumn Budget and Spending Review on 27 October.

In the first rise since 2011, employer NIC is set to increase by 1.25% to 15.05% from 6 April 2022. For many employers, particularly small businesses and those that are already struggling financially due to the pandemic, this is an unwelcome surprise. Employees are to be equally impacted, with a 1.25% increase to employee NIC, taking the employee NIC rate to 13.25% from 6 April 2022.

Whilst the NIC rates will, presumably, return to their previous levels from 6 April 2023, the increases will be maintained via the introduction of the Health and Social Care Levy from 6 April 2023. So, on top of the forthcoming increasing cost, employers will also need to factor in the additional time to introduce new payroll processes to charge and report the levy correctly.

Freeze in the personal allowance

Some tax rises are harder to spot than others. One such tax rise that flies somewhat under the radar is the freeze in the personal allowance of £12,570 until 6 April 2026. With inflation on the increase, this means that the value of the tax-free income employees earn will decrease over the coming years.

Whilst this ‘rise’ primarily affects employees and their take-home pay, it is also likely to impact employers via pressure to increase salary levels in order that employees can sustain the same level of net pay.

Increase in National Minimum Wage

Amidst the gloomy news, many employees will have been heartened to learn of the increase to the National Minimum Wage this year. From April 2022, rates have been increased to £9.18 per hour (for ages 21 to 22), £6.83 per hour (for ages 18 to 20) and £4.81 (for those under 18). For those who are 23 or over (whereby the National Living Wage is paid), the rate will increase to £9.50 from April 2022.

These increases represent a significant rise on current levels and are of course welcomed by employees. Whilst few would argue that a rise in the National Minimum Wage is not welcome or just, particularly given the rising cost of living, it will place an additional cost pressure on many businesses, especially small businesses. Any increases will also mean an increase in the amount of employer NIC and pension contributions, thereby further increasing employer costs.

It is fair to say that there have been better years for employers when it comes to employment tax, particularly when it comes to the employer compliance burden and employment tax costs. Whilst, as things stand, things are not likely to ease up any time soon, it does help to take stock of the various changes, plan ahead and make the best of what is coming in 2022.