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Payments in lieu of notice (PILON)

What is PILON?

PILON is a payment made to an employee when employment is terminated without notice, instead of the employee working through a notice period and receiving pay in the normal way.

It is different from ‘gardening leave’, in which the employee is still in employment during the notice period and is paid during that period, even though he or she is not present at work.


What has changed?

Tax laws have changed regarding PILONs from 6th April 2018.

All payments in lieu of notice on, or after 6 April 2018 are chargeable to income tax and Class 1 National Insurance Contributions (NICs), whether or not they are contractual payments.


Notes:

Please note this applies to basic pay only i.e. anything paid over and above this, we can use the £30k threshold.

PILON payments will not benefit from £30,000 threshold.

Statutory redundancy payments are not PILON payments and they benefit from the £30k threshold.

If an employer pays more than the PILON the remaining balance should be tax free up to the first £30,000.

 

Sources:

 

 

Loss reform – Corporation tax

Carried forward losses can now by surrendered via Group relief

Current law

Carried-forward losses can only be used by the company that incurred the loss, and not used in other companies in a group. Additionally, certain losses can only be set against certain types of income, for example trading losses can only be used against trading profits.

 

New Law

Losses arising after 1st April 2017 can be set off against own and group company profits. Type of income restriction is also removed.

There is a new loss restriction i.e. only 50% of the carried forward losses can be relived. Don’t worry there is an annual threshold of £5 million for each standalone company or group, ensuring 99% of companies are unaffected by the restriction.

 

Additional notes:

  1. Capital losses not effected by these new rules.
  2. Losses expire when trade closes.
  3. A company can only surrender losses under group relief after its has used its own carried forward losses against its current year’s profit to the full extent.
  4. Similarly, company claiming losses under group relief has to first exhaust its own carried forwarded losses before claiming any under group relief.
  5. Group Allowance allocation statement is also required.

 

Source:

  1. Basic guidance in simple English – see HMRC note.
  2. HMRC has recorded a webinar on this topic – click here. Then Ctrl + F > “reform”.

Head winds – restaurant sector is facing

Current turmoil in restaurant trade and what to do about it.

  • Currency:
  1. Brexit vote has weakened the sterling resulting in higher cost of food and drinks.
  • Wages:
  1. Living wage has resulted in wages increasing faster than inflation and even faster than restaurants can increase their own prices.
  2. Many new entrants in the market have resulted in pushing wages higher.
  • Property
  1. Private equity players rushed in this sector in the last few years and offered higher rents resulting in pushing everyone’s rent up.
  2. Higher rents resulted in higher Business rates.
  • Online
  1. New service model like Deliveroo have emerged which increased competition and take a share of profits.
  • Competition
  1. Supply has expended ahead of demand – there are too many restaurants.
  2. So many choices have reduced the frequency of customer visits.

 

What to do?

Everyone tells me the problems but what are the solutions?

  • Very tight control of costs:

There are three main areas where costs can be controlled.

  1. Wage cost – reduce staff through natural turnover. Staff members also have a learning curve and longer one has been in a job better they can do it.
  2. Cost of goods – chefs should be encouraged to always look for new suppliers and go to the source of food directly like farms.
  3. Overheads – Every cost to be analysed and ways thought to reduce it.

 

  • Think and encourage everyone in the business to think
  1. How to evolve and improve the offering – quality, cost, presentation etc.
  2. Increase lunch trade by shorter menus.
  3. Food coming out quicker from the kitchen.
  4. Lighter food which is easy to digest.
  5. Improving beverage sales as they take less wage cost to prepare.
  6. Staff idea board can help. Management does not have monopoly on ideas.

 

Conclusion:

Things are going to get worse before they get better. Tighten your belts and better the product and sit tight to weather the storm.

Good Luck!

Example of Property Income: Interest deduction

In 2017/18, if a landlord incurs loan costs on a let dwelling, the allowable deduction is only 75% of the cost. The remaining 25% gets tax relief at 20% in the income tax calculation.

  • This restriction does not apply to furnished holiday accommodation.
  • This also does not apply in case landlord is a company.
  • This applies only in case of residential property.

Example

Jack has employment income of £26,000 and rental income of £20,000. Costs are loan interest of £2,000 and other allowable expenses of £3,000.

£
Employment 26,000
Property £(20,000-(75% x 2,000) – 3,000 15,500
Personal allowance (11,500)
Taxable Income 30,000
Income Tax £30,000 x 20% 6,000
Less tax reducer £(2,000 x 25%x 20%) (100)
Income tax liability   5,900

Apologies, I lifted this straight out of ICAEW Vital magazine. I could not resist seeing such a simple and beautiful example.

Conclusion:

Basically, this change effects only tax payers whose total income goes over higher rate threshold (i.e. £46,351 for the tax year 2017-18) without deducting finance cost.

Example 1 : John has salary income of £30k and rental income of £15k and finance cost of £10k. John’s total income without deducting finance cost is £45k , this is below £46,351 thus no effect for John.

Example 2  : Jane has salary income of £30k and rental income of £25k and finance cost of £10k. John’s total income without deducting finance cost is £55k , this is above £46,351 thus this will effect Jane.

To learn how it will effect, see HMRC guidance.

Bonus fact:

  1. HMRC guidance mentions 82% of landlord will not be effected as their total income, without a deduction for finance costs, does not exceed the higher rate threshold.
  2. In tax year 2016-17, out of UK adult population of 53.2 million , c 30.2 million were tax payers (57% of adult population). Around 4.4 million (8%) were paying tax at 40% and 333k (0.6%) tax payers are in 45% tax bracket. Click here for Source.
  3. As per BBC article date June 2017. There are 15k individuals with incomes over £1m and 4k over £2m.

Pensions: Banded earnings and savings for employers

Ensure correct pay is used to calculate pension

We recently took a new restaurant client and were reviewing their employee pension arrangements under auto enrollment.

We noticed that the client (employer) was contributing pension on full pay rather than qualifying earnings.

Qualifying earnings  – These are your earnings from employment, before income tax and National Insurance contributions are deducted, that fall between a lower and upper earnings limit that are set by the Government.

Example: CD Ltd has an employee Jane and her monthly salary is £1,500.

Pension on full pay Pension on qualifying earnings
Monthly salary

£1,500

 Monthly salary

£1,500
Threshold – full pay

£0

 Threshold – lower band

£503
Pensionable pay

£1,500

 Pensionable pay

£997
Employer contribution @ 2%

£30

 Employer contribution @ 2%

£20

Additional employer’s contribution under full pay method is of £10.

This employer has c30 employees. Thus yearly savings are of c£3,500.

This employer also has couple of employees over upper limit, thus additional savings.

Restaurant trade inherently has a high staff turnover and it’s advisable to postpone staff pension deductions for three months to avoid deducting pension for staff members who work for a short time with the employer. We also implemented at this client which will result in additional savings.

Caution: Please ensure employees are communicated about these changes.