Autumn Budget 2017 – Nicholas Le Riche comments on the effects on HR

A number of talking points have arisen following the latest Autumn Budget announcements. Nicholas Le Riche, partner in our employment team, comments on the chancellor’s proposals and the effects on the private and public sector. This article was first published in People Management.

Budget 2017: the HR lowdown

Public sector pay caps, IR35 and investment in skills are among the talking points; full details of tax allowances and pension changes

In a budget overshadowed by the sizeable funding set aside for Britain leaving the EU, the chancellor was forced to face Britain’s low productivity and sharp growth cut with measures designed to ‘make work pay’ – in both the public and private sectors.

In Philip Hammond’s second budget this year, he announced what amounted to an end to the public sector pay cap, a consultation on expanding IR35 legislation and investments in digital skills.

Public sector pay

Hammond revealed that ‘pay structure modernisation’ discussions were underway, suggesting the longstanding public sector pay cap – which has seen rises restrained to 1 per cent since 2013 – may be lifted.

The move was welcomed in the NHS, but questions remain around the detail, and in particular whether pay rises may be linked to other contractual amendments or structural shifts. The government will offer £10 billion in capital investment in frontline health services during this parliament, with £2.8 billion for NHS England.

More immediately, the government has committed to fund pay awards as part of a pay deal for NHS staff on the Agenda for Change contract, which covers midwives, nurses and paramedics. It was outlined in the budget documents, however, that any deal will be implemented on condition that the pay award enables improved productivity in the NHS, and is justified on recruitment and retention grounds.

Danny Mortimer, chief executive of NHS Employers, said:

‘We look forward to continuing to work with trade union colleagues and the Department of Health to agree how contract arrangements can be reformed and our employees benefit from a welcome lifting of the pay cap. There is a great deal to discuss, but the chancellor’s commitment to fund the additional pay bill is welcome.

‘Meanwhile, NHS organisations are working hard to address staff concerns and better retain vital skills. But they also need national support. Increasing training numbers and improving access to affordable housing are welcome recent interventions to help employers recruit and retain staff.’

He said investment was needed in training budgets, migration policy reform and greater flexibility in apprenticeships.

Others were disappointed that the broader cap had not been lifted with immediate effect. Joe Dromey, senior research fellow at the IPPR, said:

‘The Treasury claimed last week that the public sector pay cap had been scrapped. But today, the chancellor has not confirmed a single additional penny for public sector pay. He has failed to provide the funding necessary to give public servants a pay rise, despite it requiring an increase of less than 0.5 per cent in total public spending.

‘This was a wasted opportunity to give public servants the pay rise they deserve. Instead, next year will be the eighth year of the public sector pay squeeze.’

Private sector IR35

The government will consult on extending the reformed ‘off payroll’ IR35 working rules into the private sector, in a move that is likely to cause huge technical and practical upheaval for many HR departments. The key change was omitted from Hammond’s speech but made its way into the ‘red book’ of detailed policy announcements.

IR35 rules were introduced to the public sector in April, and have meant that contractors must be either paid through PAYE or as genuinely self-employed individuals.

‘Early indications are that public sector compliance is increasing as a result, and therefore a possible next step would be to extend the reforms to the private sector, to ensure individuals who effectively work as employees are taxed as employees even if they choose to structure their work through a company,’ the budget document stated.

‘It is right that the government takes account of the needs of businesses and individuals who would implement any change.’ The document said the government would ‘carefully consult on how to tackle non-compliance in the private sector, drawing on the experience of the public sector reforms, including through external research already commissioned by the government and due to be published in 2018’.

Nicholas Le Riche, employment partner at Bircham Dyson Bell, said it was expected to be only a matter of time before the private sector was subject to the same IR35 rules as the public sector.

‘These measures fit within the government’s overall strategy of more rigorous enforcement of the tax rules in this area and come at a time when the question of what amounts to genuine self-employment is under considerable scrutiny.’

Since the chancellor’s proposals will eventually affect most organisations, it will be important for them to be easily understood – and for the government to issue clear guidance to businesses and individuals on how the rules will be enforced, he said.

Julia Kermode, chief executive of The Freelancer & Contractor Services Association, described the move as ‘fantastic’. ‘The government has finally listened to [our] many concerns regarding the public sector changes already in place, their devastating impact on the public sector and increase in non-compliant schemes that have resulted,’ she said.

‘It is very positive that the government has not simply bulldozed ahead with legislation that would have a negative impact on the flexible workforce and the UK economy as a whole’.

And Lee Hamilton, partner at Blick Rothenberg, described the government’s ‘cautious approach’ to defining employment status for tax purposes – whether a worker is deemed to be employed or self-employed – as a relief for employers, while suggesting the introduction of IR35 was not yet cut and dried.

‘There had been some concerns that the government would extend [IR35] to the private sector. However, the government plans to publish a discussion paper exploring the entire issue of employment status for tax. So further consultation is on the cards,’ he said.

Dave Chaplin, CEO and founder of ContractorCalculator, said that although the government may have announced a consultation into the proposed IR35 changes,

‘if the public sector changes are anything to go by, the recommendations already look predetermined’.

He warned that the overall tax take was at risk as people move from lucrative freelancing to lower-paid permanent work, and the cost of hiring the remaining contractors would rise as they put rates up as a result.

Investment in skills

Hammond offered a £20 million investment in a national retraining scheme designed to boost digital skills and the expansion of the tech sector. This will be in the form of digital skills distance e-learning courses, and will involve both the TUC and CBI.

The chancellor announced another £3 million investment towards aiding uptake of the apprenticeship levy, with companies including Sage UK welcoming this extra funding and support for digital skills.

There is little detail yet on how the digital funds will be spent. But Ian Brinkley, acting chief economist at the CIPD, was among those who felt the commitment was not sufficiently deep or broad.

‘Overall, the investments announced today don’t come close to reversing the historic decline in public funding for adult skills and lifelong learning,’ said Brinkley.

‘If the government wants to build an economy that is “fit for the future” then we need a much greater investment in the skills agenda, including how skills are used in the workplace.

‘The CIPD believes that at least 5 per cent of the National Productivity Investment Fund should be allocated to boosting investment in skills, and particularly for lifelong learning.’

Hammond promised more than £20 billion in new investments in new technology funds at the British Business Bank, and to facilitate pension fund access to long-term investments.

Tax rates and national living wage

The personal tax allowance will increase to £11,850 and the higher-rate threshold to £46,350 from April 2018.

With the OBR forecasting another 600,000 people in work by 2022, the government announced that the national living wage would rise 4.4 per cent from £7.50 an hour to £7.83 from April.

Catrina Smith, employment partner at Norton Rose Fulbright, said the increase would be ‘a welcome change for many and provide more security for the lowest-paid workers’, but would increase costs for employers.

The £600 pay rise minimum wage earners will enjoy from April 2018 will, however, be subject to basic rate tax and employee national insurance, said Tim Stovold, head of tax at Kingston Smith.

‘The actual increase in take-home pay each year would be £408, as nearly a third is clawed back by government in taxes. Any increase in the minimum wage puts pressure on sectors such as care homes, where pressure on costs is keenly felt and has a direct impact on the level of care that can be provided,’ Stovold added.

Rhian Radia, head of employment at Hodge Jones & Allen, said raising the living wage was ‘always going to be a relatively painless way for the government to claim that it is delivering on its pledge to protect the most vulnerable in society.

‘Business often complains about such increases, but the reality is that these are absorbed with minimal fuss. They also tend to hit industries that are least reliant on inward investment, so such a move can be made without discouraging companies from investing in R&D or new plants in the UK, which is a key plank of the government’s post-Brexit strategy.’

The government also pledged to publish a discussion paper in response to the Taylor review on employment practices in the modern economy.

‘It is hoped that any changes that result from the work done as a result leave us with an employment and tax system that better suits modern ways of working and providing services,’ Smith said.

Pensions allowance rise

The lifetime allowance for pension savings will increase in line with the consumer price index, rising to £1,030,000 for 2018-19.

Jonathan Watts-Lay, director of WEALTH at work, said it was important that employees understand the rules and take a view of their situation ‘so that it doesn’t come as a nasty surprise’.

Many employers now offer a cash alternative to remaining in a pension scheme but, unlike a pension contribution, the increase in pay is subject to income tax and national insurance, Watts-Lay added.

‘Alternatively, employees could look at diverting contributions into another type of tax-efficient savings vehicle – an ISA, for example, which is remaining unchanged at a limit of £20,000.’

Many employees now look at their workplace to offer a variety of savings schemes alongside pensions. ‘It’s good to see that many employers are now starting to adapt their reward and remuneration packages for employees, to offer them more flexible and tax-efficient solutions for saving,’ he said.

Employees on maternity and parental leave will be able to take up to a 12-month break from paying into a ‘Save As You Earn’ employee share scheme from 6 April 2018, a rise from the current six months.

Tax relief for employer premiums that get paid into life assurance schemes and certain overseas pension saving schemes will be modernised, the government announced. These changes will cover policies where an employee nominates an individual or registered charity as their beneficiary, and are set to come into effect from April 2019.

Company cars and construction

Hammond announced that people who charge electric vehicles at work will not face a benefit in kind charge from next year.

The existing company car tax diesel supplement will increase from 3 to 4 per cent from 6 April 2018, but this change will only be applicable to diesel cars that do not meet the latest emissions limits, according to the budget documents. The planned fuel duty increase for petrol and diesel scheduled for April has been cancelled.

The increased taxation on diesel was slammed by fleet operators’ association ACFO, which called it ‘grossly unfair’. Chairman John Pryor said it was ‘virtually certain’ that every diesel company car would be affected, adding:

‘With already announced company car benefit-in-kind tax rates rising year on year, the one percentage point diesel supplement increase further slices away at the value of company cars to both employers and employees.’

There will also be £34 billion to help develop construction skills and fund more jobs in the sector, as well as to ease the housing crisis.