Changes for termination payments coming in April

Here are some notable changes when it comes to termination payments:

Foreign service relief termination payments

The Government has decided that taxpayers who have worked abroad but are resident in the UK in the tax year in which their employment is terminated should be subject to exactly the same rules as taxpayers who have not been abroad. Clients will benefit from the existing £30,000 exemption only. The only exception to this change is if you are a seafarer.

In the past, employees who received termination payments and who had spent all or a large part of their employment overseas have been eligible to qualify for what is known as ‘foreign service relief’. This could potentially give them income tax relief of an amount greater than the standard £30,000 deduction. In some cases, the payment would be completely exempt from income tax.

The measure will apply to those who have their employment contract terminated on or after 6 April 2018. If the payment is received from 14 September 2017 onwards in advance of the termination of the employment, the restriction will also apply.

More restrictive PILON classification

The income associated with a contractual notice period that is not worked will no longer benefit from the £30,000 termination payment exemption. To further confuse matters HMRC are now referring to PILONs (Pay in Lieu of Notice) as ‘PENPs’(Post-employment Notice Pay) which represents the amount of pay, and/or benefits, that the employee will not receive because their employment was terminated without full, or proper notice being given.

Optimal salary for a company director - 2018 update

It’s that time of year when we need to look at the level of salary that company directors should be paying themselves from 6th April.

As in previous years, the main question is whether to pay a salary up to the Personal Allowance level or whether to pay a salary to the level at which National Insurance kicks in. We would generally recommend the second option to reduce administration. TL;DR: if the director has no other income and the Employment Allowance will be used up against other staff salaries then the best option would be for the director to be paid a salary of £8,424 (£702 per month). This should be topped up with £37,926 of dividends.

If the director is owed money by the company however they could also charge interest on their loan account so this may be an additional consideration for some. In the following it is also assumed the director wishes to stay below the higher rate tax band threshold for personal income tax. It is also assumed that they have no student loan balance, are not caught by IR35 and have a full personal allowance. It is assumed they are UK resident and have no other income, capital gains and there is no relief from tax to claim such as gift aid or pension payments.

When tax treaties don't really help...

Many countries have double taxation tax treaties with one another to allow taxpayers not to pay tax in both countries.

There are more than 3,000 double taxation treaties world-wide and the UK has the largest network of treaties, covering around 120 countries. Some treaties are more exhaustive than others but even when tax treaties cover all aspects of taxation, there can be situations where can still pay tax twice. Here are a few examples of situations that arise in practice, that we come across on a regular basis and for which unfortunately there is no easy answer.

Optimum salary for directors: changes this year

This is one of the questions we hear most often: what is the optimum salary I should take as a director?

There are many salary calculators on the web that you can use but the easiest way in the past has been to take the maximum salary that does not attract taxes nor national insurance, neither for the employee nor for the employee (see our previous article). In 2013/2014 that amount was £7,696 pa. But in 2014/2015, due to the new £2,000 Employment Allowance, there is now a new option for directors' salaries:

1. If the company is able to use all the £2,000 Employment Allowance in the year, then the best route for the Director’s salary will be to pay over the LEL but below the secondary level in 2014/15 i.e. £7,956 pa (£663 per month). The rest will have to topped up by dividends as per in the previous years.

How about the CSG and the CRDS?

If you have some French property investments, you might have noticed in 2012 the apparition of new taxes called CSG, CRDS, Financement du RSA or Solidarité Autonomie. All those are actually social charges and even though they been in existence for a while, in the past non-residents were exempt (since they don't use any of the French social infrastructure).

With the arrival of François Hollande and his socialist team, those deductions have been extended to all types of income (rental income, capital gains and dividends) and for residents and non-residents alike. What it means is if you sell a house in France you will have to pay the 19% capital gain plus the 15.5% social charges on the gain. And in some cases (if your capital gain is above €50,000) yet another exceptional tax that can reach 6% of the capital gain (if your gain is above €260,000). That's a total of more than 50%.

But unfortunately as far as the HMRC is concerned the 15.5% social charges are not considered a tax and therefore cannot be offset against UK tax. You will therefore have to top up the French tax by at least an additional 9% UK tax (assuming you are in the 28% CGT tax bracket).

Minimum wage increase

It's this time of the year where the minimum wage usually increases. This year is no exception.

The National Minimum Wages (NMW) rates are due to increase on 1st October 2013 to the following:

• £6.31 – the main rate for workers aged 21 and over
• £5.03 – 18-20 year old rate
• £3.72 – the 16-17 year old rate for workers above school leaving age but under 18
• £2.68 – the apprentice rate, for apprentices under 19 or 19 or over and in the first year of their apprenticeship

Last year, only the over 21s and Apprentices saw an increase in the NMW. But this year, all of the rates have increased.

Increased rates for maternity and sick pay

From 8th April 2013 new proposed rates of statutory maternity, paternity, additional paternity, adoption and sick pay have been announced.

They are subject to parliamentary approval but changes are unlikely. They are as follows:

• Statutory maternity, paternity, additional paternity and adoption pay will all increase to £136.78 per week (from the current rate of £135.45)
• The maternity allowance prescribed rate will also increase to £136.78 (from £135.45) per week
• Statutory sick pay will increase to £86.70 per week (from the current rate of £85.85)
• The weekly lower earnings limit applying to National Insurance contributions (below which employees are not entitled to statutory sick pay, statutory maternity pay, statutory adoption pay or statutory paternity pay, but remain entitled to maternity allowance) will increase to £109 (from the current rate of £107)

Class 4 NI refunds for sleeping partners

A “sleeping partner” is a partner who does not take any part in the running of the partnership’s business. HMRC now accepts that such a partner is not liable to Class 4 NIC, because they do not fall within the definition above. Class 4 National Insurance contributions are paid as a percentage of your annual taxable profits - 9 per cent on profits between £7,225 and £42,475, and a further 2 per cent on profits over that amount.

In the past, there has been a reluctance to classify a partner as a “sleeping partner”, particularly in the case of the standard husband and wife partnership. This was because there was a fear that HMRC would argue that the sleeping partner was not really entitled to their profit share, and that as a result the active partner had made a “settlement” on the sleeping partner by consenting to their having a share of profits they had not “earned”. The fear was that HMRC would therefore seek to tax the active partner on the profits diverted to the sleeping partner – often with the result that those profits would be liable to income tax at 40% instead of the 20% they suffered in the hands of the sleeping partner.