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Incentives and remuneration - international news 2021

Incentives and remuneration - international news 2021

Overview

On 7 September, the UK Government announced the introduction of a new 1.25% levy which is intended to pay for adult social care reforms and enable the country's National Health Service to tackle the COVID-19 backlog. In this briefing we consider the implications this might have for overseas employers.

What is the new levy?

The levy (to be called the health and social care levy) will apply from April 2022 and will initially be collected by way of a 1.25 percentage point increase to the rates of social security contributions (National Insurance contributions or NICs). From April 2023 the levy will be charged separately and the rates of NICs will return to their 2021/22 tax year levels. In the context of employments, the levy will be paid by both employees and their employers (i.e. an additional 2.5% in total). For the self-employed (such as contractors or partners) the levy is payable by the self-employed person only. The rates of tax on dividend income (above the £2,000 dividend tax-free allowance) will also be increased by 1.25 percentage points from next April. This will impact on many investors including those that are remunerated through the payment of dividends.

What impact will the new levy have on overseas employers?

Where employees come to the UK, their liability to pay UK NICs will depend on whether they come from (i) the EU (ii) a country with which the UK has a reciprocal social security agreement (a RA country) or (iii) a country to which neither (i) nor (ii) apply (a Rest of the World or ROW country). At present we only have a very broad outline of the new legislation (more detailed regulations are yet to be published), however, we have identified the following areas that we believe overseas employers and their employees will need to consider.

  • Overseas employers with employees in the UK

Overseas employers that are neither resident nor present in the UK and do not have a place of business here are not liable to pay employers' NICs. However, employers based in the EU are deemed to have a presence in the UK under the terms of the protocol on social security coordination agreed between the EU and the UK (Protocol). From April 2022, such employers will see their employers' NICs liability increase to 15.05%. In April 2023 we expect the levy (when it is charged separately) to also be covered by the Protocol but we are seeking clarification of this. Assuming the Protocol will apply to the levy, from 6 April 2023, EU employers will have to pay employers' NICs (at 13.8%) and the levy (at 1.25%) in respect of their UK employees. The new levy will be subject to the same assessment and collection process as NICs.

Employers based in an RA country should check the relevant reciprocal agreement to see whether there is a deeming provision under which they are treated as present in the UK for social security purposes. If there is such a provision, this will need to be reviewed to see whether it extends to the new levy.

  • Detached Workers/Multistate Workers/ROW workers

Under the Protocol and the terms of most reciprocal social security agreements, workers posted to the UK for a short period of time (Detached Workers) will generally be able to stay within their home social security system provided certain conditions are met. Where an individual works in both the EU/RA country and the UK (Multistate Workers) a worker will usually only have to pay social security in their country of residence. If the worker comes from a ROW country, there is potentially a 52-week holiday from NICs provided certain conditions are met. For the 2022/23 tax year, all such employees (and their employers) will not have to pay the new levy as it forms part of the NICs charge. Provided the Protocol/reciprocal agreement applies to the new levy, Detached and Multistate Workers and their employers will not be required to pay the levy from April 2023, but we await clarification of this important point. As the levy is only payable by those liable to pay NICs, ROW workers should not have to pay the levy during the 52-week NICs holiday.

  • Other practical issues

The announcement of the new levy raises several practical issues for those operating employee incentives plans in the UK:

Will it be possible to transfer the employers' levy liability?

We understand that tax-advantaged employee share plans will enjoy the same exemptions from the levy as they do for NICs. However, where a NICs charge arises under certain share incentive arrangements (including on the exercise of share options) employees can be required to pay both their own NICs liability and that of their employer. Although this increases the employee's overall tax and NICs burden, it helps the employer manage the costs of operating the plan (which can be fundamental to its ability to offer share-based incentives). When the health and social care levy is charged separately (from April 2023), we hope that the government will allow employers to transfer their liability to employees in the same way as NICs.

Do existing tax/social security indemnities cover the levy?

Companies will need to review their incentives arrangements now to make sure any indemnities for tax and social security are wide enough to cover the new levy when it becomes a separate charge in April 2023.

Prepare now

Steps to introduce the health and social care levy are moving at pace; the proposals have already been approved by Parliament and a draft bill has been published.  It is therefore important that those affected by the changes start to prepare and budget for them now. Tax rises such as these highlight the importance of tax-favoured incentive arrangements and overseas employers should give serious consideration to introducing these for their UK staff where this is possible.

If you would like to discuss the new health and social care levy and how it impacts on your incentives arrangements, please contact Mahesh Varia or Elissavet Grout in the Travers Smith Incentives team.

 

Summary of the new tax and social security rates

 

 

 

* The levy will take effect as a tax equal to 1.25% of the earnings or profits in respect of which National Insurance contributions are payable.

** Individuals that are employed above the state pension age do not pay employees' NICs on their earnings.  Such individuals will only pay the levy (from April 2023).

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