National Minimum and Living Wage increases 1 April 2021

The new National Minimum Wage (NMW) and National Living Wage (NLW) rates came into effect on 1 April 2021. The new rate for the NLW is £8.91 which is a 19p increase over last year. The NLW is the minimum hourly rate that must be paid to those aged 23 or over. The NLW used to apply only to those aged 25 and over but from 1 April 2021 has been extended to 23 and 24 year olds for the first time. The threshold is expected to further reduce to 21 by 2024. The increase represents an additional £345 per year for someone working full-time and earning the NLW.

The hourly rate of the NMW (for 21-22 year olds) increased to £8.36 (a rise of 16p). The rates for 18-20 year olds increased to £6.56 (a rise of 11p) and the rate for workers above the school leaving age but under 18 increased to £4.62 (a rise of 7p). The NMW rate for apprentices increased by 15p to £4.30.

It is important that you ensure that you have adopted the new rates as there are significant penalties for employers who are found to have paid workers less that they are entitled to by law. 

If you have underpaid an employee, you must pay any arrears immediately. There are penalties for non-payment of up to 200% of the amount owed unless the arrears are paid within 14 days. The maximum fine for non-payment can be up to £20,000 per employee and employers who fail to pay face up to a 15-year ban from being a company director as well as being publicly named and shamed.

Tax-free mileage expenses

If you use your own vehicle for business journeys, then you may be able to claim a tax-free allowance from your employer known as a Mileage Allowance Payment or MAP. The allowance is available if employees use their own car, van, motorcycle or bike for work purposes. It is important to note that this tax-free allowance is not available for journeys from home to work, but it is available where employees use their own vehicles to undertake other business-related trips. 

Employers usually make payments based on a set rate per mile depending on the mode of transport used. There are approved mileage rates published by HMRC. For cars, the approved mileage allowance payment for the first 10,000 business miles is 45p per mile and 25p per mile for every additional business mile. An equivalent payment of 20p per mile is available for bicycle travel and 24p per mile for motorcycle travel. 

If an employee travels with business colleagues, they can claim an additional 5p per passenger per business mile for each qualifying passenger.

Planning note... Where an employer pays less than the published rates, the employee can make a tax claim for the shortfall using Mileage Allowance Relief (MAR). There is no equivalent to MAR for passenger payments.

Off-payroll working rules from 6 April 2021

The rules for individuals providing services to the public sector via an intermediary such as a personal service company (PSC) changed from April 2017. The new rules shifted the responsibility for deciding whether the intermediaries’ legislation applies, known as IR35, from the intermediary itself to the public sector receiving the service.

During 2017, the government announced plans looking to extend these rules to off-payroll working in the private sector. The new rules were due to come into effect from 6 April 2020 but were delayed until 6 April 2021 because of the coronavirus pandemic. 

This means that from 6 April 2021, all medium and large-sized clients will be responsible for deciding the employment status of workers. This includes some charities and third sector organisations.

The changes mainly apply to businesses with an annual turnover of more than £10.2 million (known as the simplified test). If the simplified test does not apply, then the rules still apply if the private sector client meets 2 or more of the following conditions:

  • an annual turnover of more than £10.2 million
  • a balance sheet total of more than £5.1 million
  • more than 50 employees

HMRC has stated that it will focus on ensuring compliance with the new rules, rather than investigating past arrangements (unless they suspect fraud). HMRC has confirmed it will not open a new compliance enquiry into a contractor’s return for tax years before 6 April 2021 in circumstances where:

  • a client decides that a contract is within the off-payroll working rules (IR35)
  • a contractor changes the way they work from providing and invoicing services through an intermediary entity to now being paid via a client or end user’s payroll
  • a contractor ends a contract because they disagree with a client decision on status

This includes any decisions that may have already been made to prepare for the delayed April 2020 changes.

Tax breaks working from home

Employees who are working from home may be able to claim tax relief for any additional costs due to home working. No tax relief will be due if employers reimburse employees for the additional household expenses incurred.

The tax relief covers expenses such as business telephone calls or heating and lighting costs. Expenses that are for both for private and business use (such as broadband) cannot be claimed. Employees may also be able to claim tax relief on equipment purchased. For example, a laptop, chair or mobile phone.

Since 6 April 2020, employers can pay up to £6 per week (or £26 a month for employees paid monthly) to cover an employee's additional costs if they have to work from home. Employees do not need to keep any specific records if they receive this fixed amount. 

If the expenses or allowances are not paid by the employer, then the employee can claim tax relief directly from HMRC. Employees will qualify for tax relief based on their highest tax rate. For example, if they pay the 20% basic rate of tax and claim tax relief on £6 a week they would receive £1.20 per week in tax relief (20% of £6).

Employees can claim more than HMRC's fixed amounts but may need to provide evidence to HMRC of the amount claimed. 

Note, that if an employee is working at home voluntarily, they cannot claim tax relief.

However, these tax reliefs are available to anyone who has been asked to work from home due to the COVID-19 outbreak. 

Buying equipment for your job

Employees who need to buy substantial equipment to use as part of their employment may be able to claim tax relief. In most cases they can claim relief based on the full cost as it usually qualifies for a type of capital allowance called the Annual Investment Allowance. Any tax relief would be reduced if the employer provides a contribution towards buying the item.

The way to claim tax relief depends on the amount you are claiming for. HMRC provides the following information on making a claim:

Claims up to £2,500

You should make your claim:

  • using a Self-Assessment tax return if you already fill one in
  • online or by printing and posting form P87 if you don’t already fill in a tax return
  • by phone if you’ve had a successful claim in a previous year and your expenses are less than £1,000 (or £2,500 for professional fees and subscriptions)

Claims over £2,500

  • You can only claim using a Self-Assessment tax return. You need to register if you don’t already complete a return.

There are different rules for employees claiming for their own uniforms, work clothing and tools for work.

Tax codes for employees

The P9X form is used to notify employers which tax codes to use for employees. The latest version of the form has just been published and shows the tax codes to use from 6 April 2021. The forms states that the basic personal allowance for the tax year starting 6 April 2021 will be £12,570 (£12,500 in 2020-21) and this means that the tax code for emergency use will be 1257L.

The basic rate limit will be £37,700 (£37,500 in 2021-21) except for those defined as Scottish taxpayers who have a lower basic rate limit as well as an intermediate rate. Note, that the Income Tax rates and thresholds for 2021-22 are subject to confirmation at the budget.

As a result of the increase in the basic personal allowance, there will be a general uplift of tax codes with suffix 'L' which have increased by 7. Employers should therefore add 7 to any tax code ending in L, for example 1250L will become 1257L. The new form P9X is available online on GOV.UK to download or print.

The P9X (2021) form also includes information to help employers in the new tax year. The document reminds employers that have new employees starting work between 6 April and 24 May 2021 and who provide you with a P45 to follow the instructions at www.gov.uk/new-employee

Employing domestic staff

When you employ someone to work in your home it is your responsibility to meet the employee's rights and deduct the correct amount of tax from their salary. This can include employees such as a nanny, housekeeper, gardener or carer. The rules are different if the person is self-employed or paid through an agency.

If you employ anyone they must:

  • have an employment contract
  • be given payslips
  • work no more than the maximum hours allowed per week
  • be paid at least the national minimum wage.

Your employee is also entitled to standard employee rights such as statutory maternity pay, statutory sick pay, paid holiday, redundancy pay and a workplace pension once they meet the standard eligibility requirements. An employee must also have minimum notice periods if their employment is to end. Note, that these rules apply even if the employee works on a part-time basis although some payments depend on earnings or may be adjusted pro-rata.

It is also your responsibility to register as an employer, check any employees are allowed to work in the UK and to have employer’s liability insurance. There are different rules if you have an au pair because they are not usually considered to be workers or employees.

Confirmation of Minimum Wage increases 2021

The Chancellor used the recent Spending Review to confirm that increased National Minimum Wage and National Living Wage rates will come into effect on 1 April 2021.

From 1 April 2021, the National Living Wage will increase by 19p to £8.91. This represents an increase of 2.2%. The National Living Wage currently applies to those aged 25 and over but from next April will be extended to 23 and 24 year olds for the first time. The threshold will further reduce to 21 by 2024.

The hourly rate of the National Minimum Wage (NMW) for 21-22 year olds will increase to £8.36 (a rise of 16p). The rates for 18-20 year olds will increase to £6.56 (a rise of 11p) and the rate for workers above the school leaving age but under 18 will increase to £4.62 (a rise of 7p). The NMW rate for apprentices increases by 15p to £4.30.

The new rates mirror the recommendations made by the Low Pay Commission (LPC) which have been accepted in full by the Government. The LPC recommended smaller minimum wage increases for those aged under 23 in recognition of the risks to youth employment which the current economic situation poses.

The independent Low Pay Commission (LPC) was established following the National Minimum Wage Act 1998 to advise the government on the NMW. It is made up of representatives from all sides of industry. The increases will come into effect from 1 April 2021, subject to Parliamentary approval.

New advisory fuel rates published

Advisory fuel rates are intended to reflect actual average fuel costs and are updated quarterly. The rates can be used by employers who reimburse employees for business travel in their company cars or where employees are required to repay the cost of fuel used for private travel. HMRC accepts there is no taxable profit and no Class 1A National Insurance on reimbursed travel expenses where employers pay a rate per mile for business travel no higher than the published advisory fuel rates.

Employees can also use the advisory fuel rates to repay the cost of fuel used for private travel. In this case, HMRC will accept there’s no fuel benefit charge. The advisory rates are not binding if you the employer can demonstrate that employees cover the full cost of private fuel by repaying at a lower rate per mile.

The latest advisory fuel rates became effective on 1 December 2020. Fuel rates are reviewed four times a year with changes taking effect on 1 March, 1 June, 1 September and 1 December. You can use the previous rates for up to 1 month from the date the new rates apply.

The new rates are as follows:

Engine size Petrol – amount per mile LPG – amount per mile
1400cc or less 10p 7p
1401cc to 2000cc 11p 8p
Over 2000cc 17p 12p
Engine size Diesel – amount per mile
1600cc or smaller 8p
1601cc to 2000cc 10p
Over 2000cc 12p

Hybrid cars are treated as either petrol or diesel cars for this purpose.

Advisory Electricity Rate
HMRC accepts that if you pay up to 4p per mile when reimbursing your employees for business travel in a fully electric company car there is no profit. While electricity is not considered a fuel for tax and NICs purposes, the Advisory Electricity Rate is now published quarterly alongside the other advisory fuel rates.
 

Claiming tax relief for work related expenses

Employees who need to buy equipment to use as part of their employment may be able to claim tax relief based on the cost of the equipment acquired. In most cases you can claim tax relief on the full cost of this type of equipment as it usually qualifies for a type of Capital Allowance called annual investment allowance. Any tax relief would be reduced if the employer provides a contribution towards buying the item.

The way to claim tax relief depends on the amount you’re claiming. HMRC provides the following information on making a claim:

Claims up to £2,500

You should make your claim:

  • using a Self-Assessment tax return if you already fill one in
  • online or by printing and posting form P87 if you don’t already fill in a tax return 
  • by phone if you’ve had a successful claim in a previous year and your expenses are less than £1,000 (or £2,500 for professional fees and subscriptions)

Claims over £2,500

  • You can only claim using a Self-Assessment tax return. You will need to register if you don’t already complete a return.

There are different rules for employees who use their own uniforms, work clothing and tools for work. It is possible to claim for the cost of repairing or replacing small tools you need to do your job (for example, scissors or an electric drill), or cleaning, repairing or replacing specialist clothing (for example, a uniform or safety boots). A claim for valid purchases can be made against receipts or as a 'flat rate deduction'. However, an employee cannot claim relief on the initial cost of buying small tools or clothing for work.