The UK is forecast to grow faster than any other G7 economy this year.

Employment and demand for labour at record highs but productivity growth weaker than forecast.

Pay changes - good, bad, or couldn’t care less?

Background
 

The UK is forecast to grow faster than any other G7 economy this year, with employment and demand for labour at record highs but productivity growth weaker than forecast. A number of changes being introduced to employment law in 2016 are predominantly pay related matters which the Government hopes will aid business recovery and assist in their aim of putting the next generation first. However, there is much debate about the cost for businesses of these changes and the benefits, or those perceived, are far from settled.
 

We review in more detail below some of the main issues in this area.
 

National Living Wage
 

All workers aged 25 and over (and not in their first year of apprenticeship) are now legally entitled to be paid at least £7.20 per hour.
 

It is a criminal offence for employers not to pay the National Living Wage.


This is clearly a significant increase from the previous National Minimum wage and which will increase year on year towards a target of 60% of UK median pay by 2020, a figure expected to be around £9.35 an hour. Consequently many businesses, big and small, are concerned about the impact this may have on them.
 

What are the potential consequences for business?
 

Critics have warned of potential job losses as businesses struggle to meet, in some cases, huge increase in their wages bill. Many businesses are looking at ways to cut costs and avoid job losses, for example cutting overtime. You may have seen recent examples of this in the press.
 

B&Q is reported to be cutting Sunday pay and reducing bank holiday pay and bonuses for some staff because of the introduction of the National Living Wage. The company has since agreed to compensate employees for any losses and negotiate further over pay.
 

Similar tales are emerging as the new rate comes into play:
 

  • Tesco, is reported to be paying all existing staff £7.62 an hour and new employees £7.24 from July but has cut some premium pay and limited night shift allowances. It has offered 15% of affected staff a one-off payment for 18 months worth of the difference.
  • Food chain ‘Eat’ revealed it has cut lunch breaks, saving £3.60 per staff member per shift but has extended the living wage to all staff.
  • Café Nero has stopped offering free food to staff for lunch and has replaced this with a 65% discount voucher.
     

Analysis by the Low Pay Commission has revealed that retailers will take the biggest financial hit, with the changes affecting more than 300,000 workers. Retailers claim they will have to find up to £3 billion more a year to pay staff by 2020. It is also warned that ultimately customers may be affected by the increase with differences in pay being added to the cost at the till.
 

For example, retailer Next has said that it will have to increase prices to cover an expected £27 million cost of implementing the pay rise. We could therefore end up in a vicious circle where the living wage rises but equally the cost of living rises as businesses attempt to cover this increase in the cost of pay.
 

It is questionable therefore where the benefit of the National living Wage will be seen, if at all.
 

Termination payments
 

Employers often take advantage of certain termination payments being exempt from both employee and employer National Insurance Contributions (NICs) and the first £30,000 not being subject to income tax.
 

From April 2018, the government will tighten the scope of the exemption to prevent payments from being manipulated to avoid tax and NICs. The intention is that employer NICs will be payable on payments above £30,000 (not Employee NICs) that are subject to income tax.
 

The first £30,000 of a termination payment will remain exempt from income tax and the full termination payment will be outside of the scope of employee NICs. Many have said that this is welcome news as some more complicated proposals had been floated by HMRC. However, this does mean a possible additional cost to employers and redundancies made in this way will be more expensive than they otherwise would have been.
 

It is understood that this is not the end of changes in this area and that HMRC plans to consult further, including taxing of payments in lieu of notice whether they are contractual or not and bringing in new rules to prevent contractual termination payments being paid as damages, thus avoiding payments of tax and national insurance on them.
 

Public Sector Redundancy Payments
 

On 5 February 2016, HM Treasury published a consultation on reforms to public sector exit payments with a view to making payment terms fairer, more modern and more consistent.
 

The Government proposes to:
 

  • Set a maximum tariff for calculating exit payments at three weeks’ pay per year of service;
  • Cap the maximum number of months’ salary that can be used when calculating redundancy payments up to 15 months;
  • Set a maximum salary for the calculation of exit payments, potentially around £80,000;
  • Taper the amount of lump sum compensation an individual is entitled to receive as they get close to the normal pension age or target retirement age of the pension scheme to which they belong, or could belong, in that employment, and;
  • Reduce the cost of employer-funded pension top up payments, such as limiting the amount of employer funded top ups for early retirement, or removing access to them and/or increasing the minimum age at which an employee is able to receive an employer funded pension top up.
     

Salary sacrifice
 

The Government is considering limiting the range of benefits that allow employees to take advantage of salary sacrifice because of its concerns about the growth of such schemes. No information has been provided on which schemes are causing the concern but the government has committed its support to salary sacrifice schemes for pensions, childcare and health-related benefits such as Cycle to Work.
 

Employee shareholder status
 

The Government has committed to supporting individuals with employee shareholder status (ESS) so that they can take advantage of tax benefits on the shares awarded in exchange for relinquishing certain employment rights. The budget introduces an individual lifetime limit of £100,000 on gains eligible for capital gains tax exemption through ESS. This limit will apply to arrangements entered into on or after 17 March 2016, and will not apply to arrangements already in place.

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Louise Brenlund Associate

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