Mini Budget 2022: Employee attraction & retention

*For the latest information please see our mini budget summary

We summarise and provide our observations on some key areas to help provide helpful information to consider making changes to enhance your reward strategy whilst managing costs.

What are the key areas?

Income Tax

The Chancellor announced significant change, the like of which hasn’t been seen for a number of years. From April 2023, the Basic Rate Band will reduce from 20% to 19%. 

Given the devolved powers for Scotland relating to income tax rates, it will be interesting to see how they react given this may mean we see people moving house (particularly given the Stamp Duty announcements) in the not-too-distant future to reduce their income tax bills…

National Insurance (NIC)

The good news for employees did not stop at income tax. From November 2022, employees’ Class 1 NIC will reduce back to the rates in place in the 21/22 tax year, meaning individuals will be paying NIC at 12% and 2% rather than 13.25% and 3.25%.  This is alongside the July announcement that the threshold at which employees start to pay NIC will continue to remain at £12,570, not be reduced to mitigate the loss of NIC by removing the 1.25 percentage point increase.

Also, to ensure fairness, company directors who pay NIC on an annualised basis rather than a pay period basis (e.g. weekly, monthly), will pay a blended rate of 12.73% or 2.73%.

Employers will also benefit given the employer Class 1 NIC rate will go back to 13.8% from 15.05% from November 2022. Additionally, there will be a blended rate of 14.53% for Class 1A and Class 1B NIC, payable via Forms P11D(b) and the PAYE Settlement Agreement (taxable benefits and expenses).  

How do the income tax and NIC announcements impact pay?

The table below shows what an employee’s pay would have been for the 2023/24 tax year had these changes not been announced versus the pay following the announcements. By looking at salaries of £35,000, £70,000 and £175,000, we can see what the real impact is:

Please note we have used available thresholds and limits as published by 23 September 2022. We have also assumed minimum pension contributions are being made using the qualifying earnings definition.  This is based on an English tax payer, therefore different rates are likely to be relevant in Scotland as described above.

As shown above, all income levels increase their net pay. The announcement do highlight that higher paid individuals benefit more from the announcements overall. Therefore, employers will need to consider pay and reward for employees at the lower end of the pay bandings particularly when thinking of wider living costs interactions etc. Being mindful of pay differentials and structures will be vital too here to ensure employees feel rewarded for their roles and have economic incentive to progress and develop their skills and responsibilities.

Employers may want to consider how their “savings” in costs can be ring fenced for employee reward.

Living Wage

Separate to the Chancellor’s announcements on tax and NIC, the Living Wage Foundation announced an increase in the voluntary living wage in London and outside London. This is relevant to those employers that are accredited by the Living Wage Foundation.

Please note this is separate to the National Minimum and National Living Wage but it does put pressure on the Government to increase the minimum hourly rates an employer can pay employees when this is reviewed (likely to be changes for April 2023).

This adds cost for the employer but increases employee pay. The new rates announced were £10.90 (outside London) and £11.85 (inside London).

Share Schemes

From April 2023, qualifying companies will be able to issue up to £60,000 of Company Share Option Plan options to employees, double the current £30,000 limit. The ‘worth having’ restriction on share classes within CSOP will be eased, better aligning the scheme rules with the rules in the Enterprise Management Incentive scheme and widening access to CSOP for growth companies.

This means that employers can consider longer term incentives for key talent and senior management. Alongside this, employers may also be considering Employee Ownership Trust and LTIP arrangements. These will be important to look at in detail to plan effectively for the future.

Pensions

The pension position for employees and employers was unchanged by today’s announcements.

However, from an administrative perspective there may be a need to ensure pension scheme claim tax relief more accurately on employee pension contributions. This has been a cumbersome area in Scotland where employees pay tax at 19% or 21% and tax relief has been provided directly to the pension scheme at 20%. This problem is often fixed via Pension Salary Sacrifice being introduced but it is an area where clarification and care is required, particularly to ensure employees get the right amount of tax relief.  

On this basis, employers who have not implemented pension salary sacrifice and bonus waiver should review their arrangement and consider how this can be designed effectively for their employees given the savings that can be made. Our previous article highlights this in more detail, albeit the NIC savings will now be at 12%, 2% and 13.8% from November 2022. 

Non-Cash

Despite the NIC and Income Tax changes, employers need to continue to consider non-cash reward and the tax/NIC interaction of this to ensure attractive reward strategies are in place. We have covered in detail previously, including this article looking at travel strategy, pension, salary sacrifice, training etc and encourage employers to continue to look at these areas in detail, particularly as the recruitment market remains competitive and getting an edge through reward will be vital.

IR35

One of the biggest surprises was the repeal from April 2023 of the Off Payroll Working rules introduced in 2017 (Public Sector) and 2021 (Private Sector). Although this does not “fit” with employee retention, it is important to be aware of this change given that many organisations had put in place detailed processes and brought consultants into employment on to payroll in many instances. This meant that pay structures were updated to reflect these rules given the interaction and impact of how the organisation is structured. This may now change again following the IR35 announcement as the tax/NIC risk will revert to the Personal Service Company, not the end user.

It is important to note that although the off payroll working rules are due to be repealed, employment status for tax checks will still be the responsibility of the engager where individuals are engaged directly (I.e., not via an intermediary – personal service company).

This is certainly an area for organisations to consider, alongside reward, company structure and organisational design.

Cost of Living

Individuals need to think about living costs too and our article here looks at this in more detail, considering the wider interaction with the interest rate and energy cost positions.

Therefore, employers need to be mindful that the reductions in tax and NIC might not mean employees are overall much better off given increasing costs elsewhere that the employer has no control over. Therefore, reviewing pay, non-cash reward and making remuneration as cost effective as possible (electric cars, pension salary sacrifice) remain key areas to get right in a challenging recruitment market.

Next steps

Please do get in touch to discuss this further and let us help you be in the strongest position to attract and retain key talent.