MHA | Employment Tax and Cost of Living

Employment Tax and Cost of Living

Posted on: March 11th 2022 · read

A lot has happened since Michael Gove unveiled the Government’s flagship “Levelling Up White Paper” on 2nd February 2022. The paper sets out their plan to transform the UK by spreading opportunity and prosperity to all parts.

The unprecedented increase in energy prices, large increase in inflation and now the unrest in Ukraine, will hit public finances for some time to come.

This could derail some of the “12 Missions to Level Up”, but might accelerate the need to address some missions, such as that by 2030, pay, employment and productivity will have risen in every area of the UK.

The Low Pay Commission have reported that the increases in the National Living Wage (NLW) between 2016 and 2019 reduced pay inequality between and within UK regions, with no strong evidence of large-scale adverse employment effects.

Therefore, the Government’s March 2020 target for the NLW to reach two-thirds of median earnings (of the relevant population) by 2024, which is the £10.50 per/hour target still seems to be on track and in line with levelling up at the Gross Pay level.

However, the new Health and Social Care Levy will result in some wage increases being swallowed up by the additional 1.25% charge, to be added to National insurance Contributions (NIC) for the 2022/23 tax year.

So, what can employees and employers do? 

One of the options could be to introduce or enhance their salary sacrifice arrangements.  Whilst the Optional Remuneration Arrangements (OpRA) from 6th April 2017 introduced a new benefit where an employee has a choice of a benefit in kind or pay to ensure that the BIK will be valued at the higher of the cash foregone or the current taxable value there are still some exemptions.

These exemptions include:

  • pensions,
  • pension advice,
  • workplace nurseries,
  • purchased additional annual leave,
  • cycle to work,
  • cars with emissions of 75g CO2/km or less.

As examples, employee pension contributions could be sacrificed and, as well as attracting tax relief, these new increased employer contributions are free from NIC, which will be a saving for employees of 13.25% or 3.25% of the amount sacrificed and a saving of 15.05% for the employer too.

Alternatively, an employer may offer salary sacrifice for an ultra-low emission or full electric car.  This can save:

  • Tax and NIC
  • Personal car running costs
  • CO2 emissions

An example of the potential savings is as follows:

Can the Chancellor deliver any support in his Spring Forecast Statement?

It is difficult to see what the Spring Statement will bring to support with the potentially bleak outlook for taxation and household incomes over the next 12 months or so. The Chancellor seems set to maintain the introduction of the Health and Social Care Levy so employees and employers may need to take matters into their own hands.

Whist there is uncertainty around, there may be rewards out there for those that a brave enough to have confidence in our economy and the ability to ride a further wave of uncertainty, following Brexit and the Covid-19 pandemic. Employers should provide flexibility in remuneration packages and the use of salary sacrifice effectively to mitigate increased taxation, energy costs and general inflation.

Find out more

For further guidance on this topic, please contact your usual MHA advisor or Contact Us.

Read the latest tax commentary - visit our dedicated Spring 2022 Forecast Statement Hub.

We will be providing resources, advice and practical guidance from our experts to help you prepare and manage the impact of upcoming tax changes.

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