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Paying the high income child benefit charge

Written by admin on . Posted in Employment Tax, High Income Child Benefit Charge, self-assessment. No Comments on Paying the high income child benefit charge

From this summer, employed taxpayers who have to pay the high income child benefit charge (HICBC) will no longer need to complete a self assessment tax return. Instead, they can report the charge using HMRC’s new online service.

When the HICBC is payable

The HICBC only comes into play when an individual – or their partner – receives child benefit and their annual income exceeds £60,000. This means:

  • The charge removes 1% of child benefit for every £200 of income over £60,000.
  • Once income reaches £80,000 the charge is 100%, so the amount of child benefit is essentially reduced to nil.

For those with several children, the HICBC can result in a high effective marginal tax rate.

For 2025/26, child benefit of £26.05 a week is paid for a first child, with £17.25 a week paid for each subsequent child.

New online service

 Employed taxpayers will be able to use HMRC’s new digital service to report the amount of child benefit received. This will give them the option of paying the HICBC through PAYE:

  • Unless the taxpayer has any other income or chargeable gains, there will be no need to submit a tax return following the end of the tax year.
  • Taxpayers who are required to file a tax return for another reason will still need to report the HICBC on their return.
  • Anyone who has previously submitted a tax return needs to be careful because HMRC will continue to issue a notice to make a return. Penalties will be incurred if the notice is ignored.

It remains to be seen whether the new online service will alleviate the problems associated with the HICBC. One of the main issues continues to be a lack of awareness, despite the charge being in place for more than ten years. Also, most employed taxpayers are not used to dealing with HMRC.

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Sick Pay and Small Employers’ Relief

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Statutory payments can be problematic to administer for smaller employers, but in a rare instance of generosity HMRC compensates for this. Also, from 6 April 2025, the rate of compensation will almost triple from the current 3% to 8.5%.

Employers can usually reclaim 92% of statutory payments for maternity, paternity, adoption, shared parental and parental bereavement (statutory sick pay is no longer recoverable). However, smaller employers can recover 100% of the cost as well as the compensation. So, the total rate of recovery will be 108.5% from 6 April 2025.

Statutory neonatal care pay is being introduced from 6 April 2025, which will be recoverable on the same basis. It will be paid to a parent when their newborn is sick in hospital.

Smaller employers

You are a smaller employer if your total class 1 NIC payments were £45,000 or less for the tax year before the employee’s qualifying week:

  • Both employee and employer contributions are included, but not class 1A or 1B NICs.
  • The employment allowance reduction is ignored.
  • The qualifying week will vary depending on the type of leave. For example, for maternity pay, the qualifying week is the fifteenth week before the baby’s due date.

 The main rate of employee class 1 NIC is lower for 2024/25 than it was for 2023/24, so an employer who was previously just outside of the £45,000 threshold might qualify from 6 April 2025.

An employer can apply to HMRC to be paid in advance if they cannot afford to make statutory payments.

Recovery

Relief, whether at the normal rate or at the smaller employer rate, is claimed on a monthly basis through payroll software using the employer payment summary. Payroll software should do everything automatically, although you may need to select that you are a small employer.

HMRC’s guide to getting financial help with statutory pay can be found here.

Social media suggestion:

Statutory payment relief is increasing from April 2025. Read the finer details for small business owners here #smallbusiness #statutoryrelief #HMRC

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New tax year planning

Written by admin on . Posted in Budget, Company Director, Employment Tax, High Income Child Benefit Charge. No Comments on New tax year planning

The start of the new tax year warrants as much planning as the end of the old tax year.

While the end of the tax year on 5 April is a major focus of tax planning, it doesn’t end there. The following day may require much less immediate attention, but there is an argument for considering it to be just as important. For example:

  • Personal allowances The personal allowance for 2025/26, the new tax year, remains at £12,570, the same as it has been since 2021/22. Above that level, income tax will normally enter the equation. If you (or your spouse/civil partner) do not have enough income to cover the personal allowance, then you could consider transferring investments between yourselves so that the income generated escapes tax. You should also consider whether or not to claim the marriage allowance if your partner pays no tax and you pay no more than the basic rate (or vice versa).
  • At the opposite end of the income scale, once your income (after certain deductions) exceeds £100,000, you start losing your personal allowance at the rate of £1 for each £2 of excess. In those circumstances, a transfer of investments and the income generated can also make sense – this time by reducing your taxable
  • Other tax allowances and bands Similar principles apply to other allowances, such as the personal savings allowance (up to £1,000), the dividend allowance (£500) and the thresholds of tax bands. It is much easier to shuffle around future income at the start of the tax year than attempt to do so as 5 April looms near.
  • High income child benefit charge (HICBC) If you or your partner (marriage is irrelevant) have income (after certain allowances) of over £60,000 and both claim and receive payments of child benefit, then whichever of you has the higher income is taxed on that benefit. The tax charge is 1% of the child benefit for each £200 of income over the £60,000 threshold, meaning the tax matches the benefit at £80,000. If you have two children, this is equivalent to an extra 11.26% added to your marginal tax rate. Shifting your investment income could therefore save tax, even if you both pay the same marginal rate of tax.

For more details on these and other new tax year opportunities, please talk to us – as with year-end planning, the sooner, the better.

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Overseas workday relief set to improve

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Employees coming to work in the UK should see an improvement in the new version of overseas workday relief set to be introduced from 6 April 2025.

Current system

Under the current system of overseas workday relief, earnings for employment duties performed overseas are exempt from UK tax if:

  • The employee is not domiciled in the UK;
  • The employee is taxed on the remittance basis; and
  • The earnings are not remitted to the UK.

Relief is available for a maximum of three tax years.

From 6 April 2025

From 6 April 2025, domicile – along with the remittance basis – will be replaced by a new regime based solely on residence. Overseas workday relief will then be available to an employee coming to work in the UK if they are a qualifying new resident:

  • They can claim relief for up to four tax years after arriving in the UK, with a separate claim required each year. The claim will be made on the employee’s self-assessment tax return.
  • As is currently the case, a claim will exempt remuneration for duties performed overseas. However, it will not make any difference whether or not this remuneration is remitted to the UK.
  • Relief will be capped (per tax year) at the lower of:
    • £300,000; and
    • 30% of the employee’s worldwide employment income.

A qualifying new resident is someone who was not UK resident for the ten consecutive tax years immediately before they arrived in the UK.

Under the current system, there is no entitlement to the income tax personal allowance and the capital gains tax annual exempt amount as a result of using the remittance basis. It will be the same under the new system, because a claim for overseas workday relief for a particular tax year will result in the loss of both allowances.

HMRC’s technical note on reforming the taxation of non-UK domiciled individuals (with overseas workday relief covered on pages 12 to 16) can be found here.

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The consequences of higher employer’s national insurance contributions

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The impact of the Budget’s increases in national insurance contributions (NICs) are not limited to employers.

There were three main changes to employer’s NICs announced in the Budget, all of which will take effect from April 2025:

  • The secondary threshold – the starting point for payment of employers’ NICs – will be cut from £9,100 to £5,000. The employee’s starting point remains at £12,570.
  • The employer’s NICs rate will rise from 13.8% to 15.0%.
  • The employment allowance, effectively an employer’s NIC credit, will be increased from £5,000 to £10,500.

The cut in the secondary threshold is the biggest revenue raiser and the change provoking the most complaints from businesses in the retail, leisure and hospitality sectors. It is easy to see why. The NICs cost of employing a part-timer earning £175 a week goes up from nil to £11.85 a week. That is before the 6.7% increase in the national living wage kicks in (or the double-digit increases for under-21s on the national minimum wage).

The Office for Budget Responsibility (OBR) anticipates that employers will react in a variety of ways, including restricting future pay rises, reducing hours and cutting back on recruitment. There may also be a rise in self-employment (where the maximum total NICs rate is now 6%) and individuals working through one-person companies, although this is a contentious area. The line between a contractor and an employee has seen plenty of legislation and litigation over recent years.

If you are already self-employed, then on purely tax grounds, the appeal of incorporating has been reduced by the rise in NICs. It had already been weakened by increased tax on dividends, which are now in many instances a more costly way for an owner-director to draw profits out of a company rather than taking a bonus.

If you are an employee, then one indirect benefit you may see because of the NICs rise is the introduction (or improvement) of salary sacrifice schemes for pension contributions and, possibly, electric company cars. Both can save the employer NICs, part of which is often passed on to the employee.

More detail on the change to employer’s NICs can be found here.

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Umbrella companies back in the spotlight

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Umbrella companies are often used to employ workers on behalf of recruitment agencies and end clients. However, HMRC is making changes from April 2026 to deal with umbrella companies who don’t comply with their tax obligations.

HMRC analysis shows that around 40% of umbrella companies engaging workers for 2022/23 failed to comply with their tax obligations.

It is relatively easy to create an umbrella company, so the individuals behind non-compliant businesses can quickly establish new companies and relaunch them into the umbrella company market.

Change in responsibility

From April 2026, responsibility for accounting for PAYE and national insurance contributions (NICs; including employer NICs) will move from the umbrella company to the recruitment agency that supplies the worker to the end client. Where there is no agency in a labour supply chain, responsibility will sit with the end client:

  • Recruitment agencies and end clients will still be able to contract with umbrella companies exactly the same as they do now.
  • However, if the umbrella company fails to remit the correct amount of tax and NICs to HMRC, the recruiter or the end client will in future be liable for any shortfall.
  • Workers should benefit, since, by avoiding being a party to non-compliant tax arrangements, they will not end up facing large, unexpected tax bills.

The logic behind the change in responsibility is that recruitment agencies and end clients can generally choose who they want to work with, so in future they will be careful not to deal with illegitimate operators.

Going forward

Smaller employment agencies will probably want to continue outsourcing the payroll function to umbrella companies. Given the potential cost of using a non-compliant company, agencies – and maybe end clients – should be more careful than ever in undertaking due diligence checks and/or having legal indemnities in place.

While the changes won’t take place until April 2026, it is advisable for updated systems should be in place well before then. Contracts will need to be scrutinised and fee arrangements re-evaluated.

HMRC’s policy paper explaining how it will tackle non-compliance in the umbrella company market can be found here.

Employment expenses pushed to paper

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Despite its digital ambitions, HMRC has recently reverted to paper-based claims for employees who want to make a claim for employment expenses. The change from an online basis has been made to reduce fraud.

Reports suggest that businesses are claiming expenses even when there is little, or no, business relevance in an attempt to counteract increasingly onerous tax burdens. Given HMRC’s move to paper-based claims for employment expenses, it seems as if some employees may have adopted a similar attitude. Tax refund companies have also misused the expenses system in order to obtain inflated tax repayments.

Form P87

Employees can claim tax relief for expenses through PAYE if they have not been reimbursed by their employer. From 14 October this year, claims must be made using a paper form P87 which is then posted to HMRC. Claims have to be supported by appropriate evidence. For example:

  • Professional subscriptions: receipt copy showing how much was paid.
  • Mileage allowance: mileage log copy, giving the reason for each journey; with start and finish points.
  • Subsistence: hotel or restaurant receipts copies.
  • Working from home: proof that an employee is required to work from home, such as a copy of the employment contract. An employee who simply chooses to work from home is not eligible for a claim.

Despite the change, online claims can still be made for flat rate expenses (uniform, work clothing and tools). HMRC expects the digital claim route to be available again from next April.

Self-assessment

An alternative to claiming via PAYE is to claim for employment expenses when submitting a self-assessment tax return. If employment expenses for the year exceed £2,500, this is the only permitted route.

Although there is no initial requirement to provide evidence when claiming employment expenses this way, HMRC will be extending the number of compliance checks on the eligibility of expense claims made. In such cases, they may request further evidence.

HMRC guidance on claiming tax relief for employment expenses can be found here.

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Double hit for employers

Written by admin on . Posted in Employment Tax, National Insurance Contributions, National Living Wage, National Minimum Wage. No Comments on Double hit for employers

The October Budget was not particularly kind to employers, with the cost of employer national insurance contributions (NICs) going up substantially from April 2025, combined with inflation-busting increases to the National Living/Minimum Wage.

Employer NICs

From 6 April 2025, the rate of employer NICs will increase from 13.8% to 15%, and the starting annual threshold will be lower at £5,000 (it is currently £9,100). For example, for someone employed on £50,000 per annum, the employer NIC cost will be just over £1,100 higher for 2025/26:

  • The increased 15% rate will also hit employers if they provide taxable benefits, such as medical cover, to employees.
  • The £5,000 threshold will stay in place until 5 April 2028. The threshold reduction will have a disproportionate impact on employers with a large number of low earners.

On the plus side – especially for smaller employers – the employment allowance is being increased from £5,000 to £10,500. Currently, this allowance is not available where employer NICs were £100,000 or more in the previous tax year. This restriction will be removed.

Although four full-time workers on the National Living Wage can be employed without any NIC cost for the employer, the changes are likely to see employers being increasingly careful with their recruitment policies.

National Minimum/Living Wage

Minimum wage rates will see substantial increases from 1 April 2025, with younger workers and apprentices benefiting the most:

  • For those aged over 21 and over, the hourly rate will go up by 6.7% to £12.21.
  • For 18- to 20-year-olds, there is a 16.3% increase to £10.00.
  • For apprentices and those under 18, the increase to £7.55 represents an 18% hike.

This follows similarly high increases in April 2024. Employees will welcome the uplift, but many employers will struggle with the additional cost; especially those in the hospitality sector. For full-time employees aged 21 and over, the increase is worth £1,400 a year. For 18- to 20-year-olds, the annual benefit is potentially worth over £2,500.

The rates of National Minimum/Living Wage can be found here.

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Tips and troncs – what does it mean for your business?

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Since July, it has been illegal for employers to withhold tips from staff. The payment of tips will probably result in a national insurance contribution (NIC) cost for both employer and employees, but this extra cost can be circumvented if a tronc arrangement is used to distribute tips.

The new legislation applies mainly to those operating in the hospitality sector, and covers all tips, gratuities and service charges. It also brings the law into line with modern payment practices as it covers tips left via card payment.

NICs

Tips paid to employees are subject to both income tax and employee NICs. The NIC cost is at a rate of 8% where tips – when added to normal earnings – fall between £1,048 and £4,189 monthly. Employers pay NICs once a monthly threshold of £758 is reached, although their liability is normally reduced by the annual £5,000 employment allowance.

For example, if a restaurant pays out £25,000 worth of tips, the employer will probably be facing an additional NIC cost of nearly £3,500. The cost for the staff could be up to £2,000. This is where a tronc arrangement comes into play.

Troncs

A tronc is an arrangement used to distribute tips. It is run by a troncmaster.

Provided it is the troncmaster who decides how tips are to be distributed among staff, there are no employee or employer NICs on amounts paid out. It is still possible, however, for the tips to be included on the employer’s payroll.

The troncmaster will typically be a member of staff, although larger businesses might prefer to use the services of a specialist provider. There is no problem if the employer makes the decision on who to appoint as troncmaster; what is important is that the employer plays no part, directly or indirectly, in the allocation of tips.

HMRC’s detailed guidance on tips, gratuities, service charges and troncs can be found here.

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Fiscal Drag: Caught in the 60% tax trap?

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The number of taxpayers caught in the 60% tax trap has increased by nearly 25% over the past year. More than 500,000 people are now affected by higher tax rates due to their income exceeding £100,000.

The 60% rate applies to income between £100,000 and £125,140. This is the tranche of income which sees the £12,570 personal allowance tapered away.

Fiscal drag

There has been no change in the £100,000 income limit since the withdrawal of the personal allowance was introduced in 2010, a classic case of fiscal drag. Once the personal allowance is fully withdrawn, higher earners pay the additional rate of 45% on income in excess of £125,140. However, the 60% charge still applies to income between £100,000 and £125,140.

The past year has seen a particularly high increase in individuals caught by the 60% tax trap due to inflation driving up salaries. The government is unlikely to fix the problem by reinstating the personal allowance for higher earners – the cost would be prohibitive. However, smoothing the transition is a possibility. For example, tapering the personal allowance by £1 for every £4 (rather than £2) that income exceeds £100,000 would reduce the 60% tax rate to a rate of 50%.

Planning measures

Measures that can be taken to mitigate the 60% tax trap vary from individual to individual:

  • Pension contributions are particularly attractive if the government is funding 60% of the cost. Be warned, however, that the October Budget might see the tax relief given on pension contributions restricted to a flat rate.
  • Some income reallocations might be possible between spouses and civil partners, especially if they are in business together.
  • Make the best use of tax-free investments to turn taxable investment income into non-taxable income.
  • Be mindful of the timing when cashing in investment bonds or making pension withdrawals.

Employees should consider using a salary sacrifice arrangement for pension contributions or low-emission company cars.

Details of income tax rates and personal allowances for the current tax year can be found on the government website here.

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