Years written across a country road with 2023 highlighted
Happy New Tax Year!

With a new tax year recently begun, it is a good time for employers to tick off a number of simple tasks to keep their tax affairs in order, and to consider whether any changes in their employee remuneration arrangements might be needed. It is also worth looking at whether the big changes to pensions announced at the Budget in March will affect your employees, which we’ve covered as a separate section at the end.

As a reminder, the tax-free personal allowance has been frozen until April 2028, along with the levels of income at which basic and higher rate tax is payable. For higher earners, the income threshold for the 45% additional rate of tax has been reduced from £150,000 to £125,140 from 6 April 2023. With inflationary pressure on wages, all of this means more people will face higher tax liabilities, meaning the following basic steps are more important than ever in making sure employees’ tax affairs are kept in order.

PAYE codes

Although the personal allowance has not changed for the 2023/24 tax year, you should still make sure you are operating the latest PAYE codes (as advised by HMRC) for all employees. The start of a new tax year could have brought new adjustments for employees' tax codes or meant adjustments from the previous tax year are no longer relevant and have been removed from their codes.

Employment Allowance

Small employers may be able to reduce their National Insurance Contribution (NIC) costs by £5,000 so make sure you have elected to claim the Employment Allowance via your payroll software if you are eligible.

The main condition is that your employer’s NIC liability (i.e. Class 1 secondary NICs) in the previous tax year must have been under £100,000. The allowance is deducted from the first NIC payment of the year, or rolled forward until it is used in full. Further details are available on the Gov.uk employment allowance pages and HMRC have issued their own more detailed guidance for employers.

Benefits in kind

With rising tax costs, tax-efficient benefits in kind such as electric company cars, the cycle-to-work scheme and employer-subsidised canteens are alternative ways of remunerating your employees without the unpleasant tax consequences of other benefits. If you can do so, now could be a good time to consider offering this kind of alternative to salary.

Pension contributions

Employer contributions to an employee’s pension fund, including those made under salary sacrifice, are not taxable benefits. No tax is payable by the employee on pension contributions received, and no NIC is payable by either the employer or employee. With the increase in the Annual Allowance for pension contributions, removal of the life time allowance and more flexibility for those who have previously drawn on their pension (see Budget changes below), employees may look to increase their pension contributions to reduce the amount of tax they pay. Structured correctly, this can result in National Insurance Contributions (NIC) savings for employers too.

Budget changes to pensions

Changes to employees’ pension arrangements can have significant financial benefits for them both now and later in life, with the potential for employers to reduce their NIC burden too. Offering flexible pension arrangements can be a powerful staff recruitment and retention measure, helping employers to build a stable workforce.

The main announcements in last month’s Budget concerning employers (and employees) were the relaxation of a number of pension allowances:

  • The limit on contributions which can be made to a pension fund tax-free each tax year (the Annual Allowance) has increased for most people from the current £40,000 to £60,000 from 6 April 2023 (although anyone with taxable income over £200,00 may be subject to a lower limit). Further details can be found at https://www.gov.uk/tax-on-your-private-pension/annual-allowance
  • The Lifetime Allowance, which restricts the amount individuals can accumulate in their pension fund before they incur a tax charge on accessing the pension has been scrapped, meaning greater freedom to build up a pension pot without the risk of tax being charged if its value exceeds a certain amount.
  • Where an individual has retired and already accessed their pension fund, the amount they can then contribute to any pension without incurring a tax charge has been increased from £4,000 to £10,000. This should provide greater freedom for older employees who have returned to work after drawing a pension to continue paying into a pension fund, something which may become more common due to the Government’s returnerships scheme.

Whilst the practicalities of running a pension scheme can largely be outsourced to a pension provider, any changes to monthly deductions as a result of the changes above will still impose an administrative burden on employers. Many employers offer a restricted time window in which employees can alter their pension arrangements each year, to reduce the frequency of updating payroll entries.

A little time spent running through the above points now could help your employees get their tax right for the new year, helping them to plan their finances against a backdrop of high inflation and rising living costs.

 

This article reflects the position at the date of publication (13 April 2023). If you are reading this at a later date you are advised to check that that position has not changed in the time since. 

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