New Tax Year Brings Plenty of U.K. Payroll Changes

The last couple of years have been unique for everyone, and this has highlighted the value of payroll professionals around the world.

The COVID-19 pandemic has created constant changes to the workforce, payroll legislation, working arrangements, and payroll processes. The U.K. has been no exception to this and although temporary COVID-19 measures are gradually being lifted, unprecedented changes to payroll legislation will continue to emerge as we enter the new tax year that started in April. Here is a look at some of those expected changes:

Income Tax Changes

The standard tax-free allowance for income tax has frozen, meaning the annual amount individuals can earn before they start paying income tax has remained at £12,570.

In recent years, this has increased every tax year, but the rates are currently frozen until April 2026. It’s been confirmed that the basic rate of tax will be changing to 19% beginning April 2024.

It’s worth noting that Scotland and Wales have devolved status to set their own tax rates.

National Insurance Changes

For the 2022-2023 tax year, a majority of National Insurance (NI) thresholds have increased in line with the consumer price index (CPI), which is a measure of inflation.

HM Treasury confirmed the NI thresholds during the autumn budget in 2021; however, in March 2022, the chancellor surprised the nation by announcing that the primary threshold (PT) will increase again in July. This increase will be more significant, as the threshold will be aligned with the income tax allowance, meaning that employees will be able to earn £12,570 a year* without having to pay any income tax or NI contributions. Table 1 shows the increase to these thresholds.

Table1—NI Threshold Changes

*It should be noted that for 2022-2023, the annual PT will not be £12,570, as the uplift is only applicable from 6 July 2022. As a result, the annual primary threshold for 2022-2023 will be £11,908 (13 weeks at £9,880 and 39 weeks of £12,570).

Changing a threshold in the middle of a tax year is unusual, and the reason cited was to allow all payroll software providers time to implement the change. Commentators from the payroll industry have shared various opinions on this point, with some software providers insisting the change would be simple to implement at the start of the new tax year on 6 April. 

Another significant change is the new employer NI relief for those employing eligible freeport employees from 6 April 2022. Freeports are special areas within the U.K.’s borders where different economic regulations apply. Freeports in England are centred around one or more air, rail, or seaport, but can extend up to 45km beyond the port. Eligible employers with physical premises in a freeport tax site are encouraged to create new vacancies through a range of tax incentives, including the relief from paying employer NI on employee income up to a certain amount.

Eligible employers will not have to pay any NI contributions on the first £25,000 earned by eligible freeport employees for up to 36 months. To be eligible, the employee must be employed on or after 6 April 2022 and spend 60% or more of their working time within the freeport tax site.

NI relief was also introduced for another category of employees in 2021-2022—eligible veterans who have served in the armed forces. Employers do not have to pay NI contributions on any earnings up to the veteran’s upper secondary threshold (which is aligned with the upper earnings limit or UEL) for eligible veterans in their first year of civilian employment. While relief for eligible veterans NI was introduced from April 2021, it’s only from April 2022 this can be claimed in real time. Claims for the previous tax year can be made retrospectively from April 2022.

New Health, Social Care Levy

In September 2021, the government announced it would be introducing the health and social care levy from April 2022. This is an additional tax on eligible income, payable by employees, employers, and the self-employed, which will be used to “support health and social care bodies in the U.K.”

The government has explained the introduction of the levy by stating: “All parts of the U.K. need a long-term solution to funding health and social care. This levy provides a U.K.-wide approach which enables us to pool and share risks and resources across the U.K.”

In tax year 2022-2023, the levy will be collected through an increase in NI contributions of 1.25%. NI contributions are generally payable on earnings above the PT for employees and earnings above the ST for employers.

Table 2 shows the percentage rate increase for NI in 2022-2023. In tax year 2023-2024, the rates will revert to the 2021-2022 values and the health and social care levy will be taken as a separate deduction of 1.25% on eligible pay.

Table 2—NI Percentage Rate Increase

HMRC has asked employers to include a payslip message for employees to explain their increased NI contribution. The suggested message is: “1.25% uplift in NICs funds NHS, health and social care.”

Minimum Wage

The national living wage (NLW) is the minimum hourly rate of pay that workers and employees, who are age 23 and above, must be paid. The government has a target of aligning the NLW to two-thirds of average (median) earnings by 2024, and of making it applicable to anyone age 21 and above within the same timeframe.

Table 3 shows the NLW and the national minimum wage (NMW) rates of pay applicable from pay reference periods beginning on or after 1 April 2022.

Table 3—Pay Rates Percentage Increase

It’s illegal to pay workers less than the relevant minimum rates. Employers caught doing this are publicly named and shamed by the Department for Business, Strategy, and Industrial Strategy (BEIS). This can seriously damage a company’s reputation, and the resulting fines, penalties, and employee back pay may also be substantial.

Message to Payroll Professionals