PFS What's new bulletin - March I

TAXATION AND TRUSTS

 

Impacts of the 2021 off-payroll working rules (IR35) reform - updated stats from HMRC

(AF1, AF2, JO3, RO3)

 

Since 6 April 2021, all medium and large-sized private sector organisations have been responsible for deciding if the IR35 rules apply to their contractors. The off-payroll working rules (IR35) were similarly reformed for public sector organisations in 2017. 

 

First announced in an ‘Inland Revenue’ press release 35 on 9 March 1999 (and known as IR35 ever since), it was intended to clamp down on the growing use of one person limited companies (personal service companies, or PSCs) to allow workers, who would otherwise be employees of the end client, to take advantage of tax-efficient payments, such as dividends, via an intermediary.

 

Note that if a worker provides services to a small end client in the private sector, the worker will continue to be responsible for deciding their employment status, and if the IR35 rules apply.

 

Back in December 2022, HMRC published its analysis on the impacts of the 2021 off-payroll working rules reform in the private and voluntary sectors.

 

HMRC has now published Update to the impacts of the 2021 off-payroll working rules reform in the private and voluntary sectors which is based on the latest data available. The updates in numbers are as follows.

 

·         The 2021 off-payroll working rules affected approximately 120,000 workers. This includes those workers who are reported as continuing to work through their own PSC but have been deemed as an employee for tax purposes by their client or “inside IR35” as commonly known. It also includes those who have moved to become an employee of another organisation that is not their own PSC, such as an umbrella company. The majority of workers who changed payrolls (96%) became employees of organisations other than their own PSC.

 

·         280,000 workers transitioned from their own PSC payroll to another organisation’s payroll between October 2019 and March 2022. Approximately 40% of these transitions were attributed to the off-payroll reform.

 

·         An estimated 45,000 fewer new PSCs were formed from April 2020 to March 2022.

 

·         The reform is projected to have generated around £4.2bn in additional tax, national insurance contributions (NICs) and apprenticeship levy payments by March 2023.

·         The average annual tax increase per affected worker is estimated at £10,000, although some reported increased pre-tax incomes. 

 

·         The affected PSC workers represent about 1% of the total workforce, with no sector seeing more than 10% of PSC workers changing payrolls.

 

·         3,000 additional workers became sole traders in the 2022/23 tax year.

 

·         Only 70,000 workers changed payrolls between April 2022 and March 2023, indicating a stabilisation in employment patterns post-reform. The overall reduction in PSC use was estimated at 14% between September 2019 and April 2022, with around 1.5m individuals likely to be working through a PSC during the analysed period.

 

HMRC says that there has only been a small change since first reporting, but this is primarily due to newer data and improvements in their methodology. The new estimates include the number of new PSCs forming, average monetary impact for workers and a more detailed analysis of impacts across the sectors.

 

However, it should be noted that there is no legal definition of a PSC. This means that HMRC is unable to definitively identify those who should be affected by the rules. A PSC is just a limited company with a sole director and majority shareholder, and not all of these are PSCs. The analysis also acknowledges challenges in isolating the reform’s impact from other labour market changes, such as the Covid-19 pandemic. 

 

Changes in contractor engagement primarily occurred around the time of the reform, with no significant ongoing impacts observed afterwards. HMRC estimates that, after April 2022, there were no additional changes in how PSCs provided their services, regardless of the reform. This suggests that most organisations that decided to change did so around the time of the reform. HMRC has not seen a continued impact from clients making new changes to how they offer their roles. 

 

It was also observed that there were more PSC workers unaffected by the reform than were affected by it.

 

HMRC also analysed data on which sectors have seen the largest impact on the use of contractors, based on the sector the PSC reports working in. The sectors that were mainly affected by the reforms are as follows.

 

·         Professional, scientific and technical activities – the total number who changed payrolls between Oct 2019 and March 2025 was 97,000 or 30% of the market. 

 

·         Information and communication – the total number who changed payrolls between Oct 2019 and March 2025 was 79,500 or 24% of the market. 

 

These were the two sectors where the majority of the workers moved from their PSCs to another organisation’s payroll. So, collectively, those two categories made up 54%. The number of PSCs that moved to another payroll after this time dropped significantly. 

 

On additional tax revenue, HMRC estimates that an additional £4.2 billion has been generated in tax revenues overall in the period October 2019 to March 2023 as a result of the reform. This is based on those workers who have moved to another organisation’s payroll because of the reform or have been deterred from working through a PSC during the period October 2019 to March 2022.  

 

This is a considerable increase from HMRC’s estimate, in its December 2022 report, that an additional £1.8 billion had been generated in tax revenues in the period October 2019 to March 2022 as a result of the reform.

 

However, on costs incurred in relation to the reform, HMRC says that it has not sought to update its December 2022 findings on the collective costs incurred by client organisations implementing the reform and the support and education HMRC provided to support taxpayers, as it does not have any additional evidence to carry out this exercise. 

 

IR35

As a reminder, the four key factors for a worker to prove that they are genuinely self-employed, and not caught by IR35 are:

 

1.      No control – there must be no, or absolutely minimal, control over the worker.

 

2.      No mutuality of obligations – to be self-employed, the worker has to show that they can turn work down. If there is an obligation for the end client to give work to the worker, and the worker has to accept it, there would be mutuality of obligations, and the worker would be an employee.

 

3.      Substitute – ideally the worker would have a substitute, at the same technical level as the worker, and have used that substitute. The worker, or their personal services company, must have chosen, engaged and paid the substitute.

 

4.      Insurance – the worker, or their personal services company, must ideally have paid public liability insurance or other relevant insurance relating to their work.

 

To be self-employed the worker has to win on both of the first two: no control; and no mutuality of obligations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Up to 300,000 taxpayers will no longer be required to file a tax return (AF1, RO3)

 

The Treasury’s plans to increase the income tax self-assessment reporting threshold for trading income, from £1,000 to £3,000 gross.

 

According to a HM Treasury Press Release, up to 300,000 people, including those with what are known as side hustles, will no longer need to file a self-assessment tax return.

 

This includes, for example, people trading clothes online, dog-walking or gardening on the side, driving a taxi, or creating content online.

 

The Press Release says that this will benefit around 300,000 taxpayers. An estimated 90,000 of them will have no tax to pay and no reason to report their trading income to HMRC. Those who do owe tax, but are under the reporting threshold, will be able to use a new online service. 

 

Exchequer Secretary to the Treasury, James Murray said:

“From trading old games to creating content on social media, we are changing the way HMRC works to make it easier for Brits to make the very most of their entrepreneurial spirit. 

Taking hundreds of thousands of people out of filing tax returns means less time filling out forms and more time for them to grow their side-hustle.

 

We are going further and faster to overhaul the way HMRC works to make sure it delivers the Plan for Change that will help put more money in people’s pockets.”

 

Eve Williams, CEO of eBay UK, commented:

 

“This will be welcome news for thousands of UK sellers for whom eBay is a side hustle and a means of supplementing their household income during challenging times. By removing the paperwork associated with selling online, hopefully we will help these side hustles grow into fully fledged small businesses.”

 

Comment

It’s currently not clear exactly when this change will be introduced. The Treasury’s Press Release says: “within this parliament”. It’s also not clear if the new £3,000 threshold will also apply to those with rental profits, or if this announcement means that it will become possible to use the new £3,000 threshold as a deduction against property or trading income, as is the case with the current £1,000 threshold. We will update you on any developments.

 

 

 

 

 

 

 

 

 

 

Changes to hybrid company car benefits

(AF1, RO3)

 

A change in the standard for measuring CO2 emissions. It will reduce the appeal of some hybrid cars for company car drivers in 2025

 

In April 2020, the basis for company car taxation underwent a significant, if technical change. While the scale percentages continued to be linked to CO₂ emissions, the yardstick for measuring what came out the tailpipe was changed from New European Driving Cycle (NEDC) to the Worldwide harmonised Light vehicles Test Procedure (WLTP).

 

One of the more curious aspects of WLTP was the results for plug-in hybrid electric vehicles (PHEVs). Cars with batteries that could support as little as 30 miles in electric-only mode scored sub-50g/km CO₂ emissions, allowing them to qualify for ‘low emission’ status and favourable benefit-in-kind (BIK) scale percentages. They also had showroom labels boasting fuel consumption exceeding 100 mpg. A good current example is the Range Rover Evoque S P270e Petrol Plug-in Hybrid which has CO₂ emissions of 33g/km, an electric-only range of 38 miles and combined fuel consumption of up to 197.5mpg. Its nearest diesel equivalent, with 40% less power, produces 174g/km of CO₂ and 44.6 mpg. The PHEV Evoque has a BIK charge of 12% for 2024/25 while its diesel counterpart hits the 37% maximum.

 

Unsurprisingly, the result has been that PHEVs have been popular with company car drivers who do not want, or have no option of, a fully electric vehicle. One estimate is that 15% of all salary sacrifice company car schemes involved PHEVs. That looks set to change.

 

The WLTP test for PHEVs has now been revised by the EU, creating a new Euro 6e-bis standard. This aims to produce something closer to ‘real world’ results, based on a longer test distance (2,200km rather than 800km) and revised usage patterns. The new standard has been compulsory for all newly introduced vehicles since 1 January 2025 and will apply to all new manufactured vehicles from 1 January 2026. Between those two dates, manufacturers will be re-homologating existing PHEV models.

 

There are few old v new comparisons available at the moment, but one that is widely quoted comes from the International Council on Clean Transport (ICCT) which analysed the effect on a BMW X1 xDrive25e PHEV. That car has an electric-only range of about 43 miles and its current official CO₂ emission value is approximately 45g/km. When applying the new Euro 6e-bis standard, the CO₂ emission value almost doubles to 96g/km. In terms of scale charge the emission increase implies a move from 8% to 24%. It would also mean the car was:

 

·         No longer eligible for the carve-out from Optional Remuneration Arrangement (OpRA) rules. The exemption only applies if CO₂ emissions do not exceed 75g/km; and

·         Would qualify for 6% a year reducing balance capital allowance, rather than the 18% which applies in the 1-50g/km band.

 

For company car drivers, the introduction of Euro 6e-bis means:

 

·         Existing PHEV company car drivers are unaffected. For car benefit purposes the CO₂ emissions figure at the date of first registration is set for the life of the car.

·         Anyone ordering a new PHEV now runs the risk that by the time their vehicle arrives, it will have been re-homologated under Euro 6e-bis which will then apply in determining scale charges.

·         From 1 January 2026 Euro 6e-bis will apply to all newly manufactured vehicles and newly registered vehicles.

Comment

Euro 6e-bis is just the first step to Euro 6e-bis-FCM which should arrive in 2027, adding further to PHEV CO₂ emission numbers. The 2027 version is projected to see the figure for a BMW X1 xDrive25e PHEV rise to 122g/km of CO₂.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INVESTMENT PLANNING

            

The US stock market - the Trump effect

(AF4, FA7, LP2, RO2)

 

The US stock market, which is defying bullish predictions made after the November election

 

 

The graph above tells the story of the performance of the US stock market (S&P 500 in red) and four other major markets from close on 4 November 2024, the day before the US election, to close on Monday 10 March 2025. The dotted line marks 20 January 2025, Trump’s inauguration day, and the starting date for the volley of executive orders (87 at last count) to which the new president has applied his black Sharpie pen.

 

The US market jumped about 5% in the week of the US election, and, with a few gyrations, was at the same level by the time Biden officially handed over the reins. In the interim, the year-end consensus forecast from the big US banks like Goldman Sachs was that the S&P 500 would finish 2025 at around 6,500 (it closed on Monday night at 5,614.56). Some of those banks are now rethinking their forecasts. JP Morgan has just said the market could settle anywhere between its original 6,500 and as low as 5,200.

 

The explanations of why the US outlook have darkened are plentiful. One obvious cause is that Trump 2.0 is not turning out to be the same as Trump 1.0. The markets appear to have believed that the ‘good things’ (tax cuts, reduced regulation) would happen while the ‘bad’ (widespread tariffs, trade wars) would not. Instead, so far, it is the bad that are dominating.

 

Gone too from the market’s hoped-for/believed-in list is the ‘Trump Put’ – the presidential version of the famous Greenspan Put – that assumed stock market reaction would provide guardrails against the more disruptive actions. During Trump 1.0, the president frequently cited the performance of the US equity market as proof of his success. In Trump 2.0, his line is, “…I’m not even looking at the market, because long term the United States will be very strong with what is happening here.”

 

On Monday 10 March, the Nasdaq fell 4%, taking it down over 13% from its mid-December high and thus firmly intp correction territory. Bloomberg’s Magnificent Seven Index fared worse, falling into bear market territory (20%+ fall). For once, the S&P 493 (the S&P 500, excluding the Mag 7) are providing relative support, leaving the S&P 500 1.7% above the correction level.

 

Comment

The next S&P 500 reading to watch is 5,532, which would mark a 10% fall from the all-time high established as recently as 19 February.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The House of Commons Treasury Committee is examining LISAs (FA5)

 

While the focus in recent weeks has been on the future of cash ISAs, the House of Commons Treasury Committee has been examining “whether the Lifetime Individual Savings Account (LISA) is still an appropriate financial product nine years after it was created”.

 

In the final week of February it took oral evidence from a range of interested experts, including the CEO of Home Financing at the Skipton Building Society, the ubiquitous Martin Lewis and Michael Johnson who was instrumental in the development of LISAs at the Centre for Policy Studies think tank. The transcripts of their evidence were published in the first week of March. The main points to emerge from some feisty discussions were largely as you might expect:

 

·         Withdrawal charge. As a general rule, LISAs are subject to a withdrawal charge (aka penalty) equal to 25% of the amount withdrawn unless they are used to fund a first time buyer house purchase or occur from age 60 onwards. While the 25% number matches the Government uplift to contributions, the mathematics mean that the withdrawal charge does more than claw back the uplift. It represents a 6.25% penalty (eg £100 x 125% x 75% = £93.75).

·          

This was widely considered a fault in the design that could be corrected – as it was during COVID – by reducing the charge to 20% (eg £100 x 125% x 80% = £100). The committee heard that “…last year, nearly 100,000 people paid the withdrawal penalty, and only 56,000 people used their LISA to buy a new home.”

 

·         Dual role ambiguity. Experience so far is that the great majority of LISAs are started as a savings vehicle for homebuying. As such, they are predominantly cash-based. This means that if they end up not being used for a first property purchase, e.g. because of the price threshold, by default they become pension savings with inappropriate underlying assets.

 

Michael Johnson suggested that this was an inevitable feature of the LISA when it was conceived as the initial step on the path of replacing the pensions tax regime with an alternative that effectively incorporated basic rate relief. However, the path has ended – so far – at the first step.

 

There was some debate about whether it would be better to have two separate LISAs – one for homebuying and one for retirement – but a further proliferation of products was greeted as unnecessary complication by some committee witnesses.

 

There was more agreement about the strange logic of a retirement plan that could not be started after age 39, could not be contributed to once age 50 was reached and had an effective minimum retirement age (60) higher than applies to existing full pension products.

 

·         House price cap. If a LISA is to be used for home purchase, the maximum property value is £450,000 throughout the UK. Skipton Building Society noted that when the LISA was launched in 2017, the average first-time buyer property price would have exceeded that price cap in around 4.2% of local authorities, but in two years’ time, that proportion will be around 12%. Had the cap been linked to house price inflation, it would now be £585,000. There were several voices which suggested the cap should simply be scrapped.

 

Comment

 

LISAs have a tax cost of about £500m a year, so are a relatively small expenditure in the overall ISA cost. However, the committee’s evidence underlined the unsatisfactory structure of the product and, alongside calls for a reduction in cash ISA subscription limits and a greater UK focus, adds to incentives for the Chancellor to overhaul the ISA regime.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PENSIONS

 

PPF publishes updated PPF 7800 index - March 2025

(AF3, FA2, JO5, RO4, RO8)

 

Since July 2007 the Pension Protection Fund has published the latest estimated funding position, on a s179 basis, for the defined benefit schemes in its eligible universe. This covers 4,969 schemes in the PPF-eligible universe, which is the same number as for the previous month. 

February 2025 update highlights:

 

• The aggregate surplus of the 4,969 schemes in the PPF 7800 Index is estimated to have decreased over the month to £232.7 billion at the end of February 2025, from a surplus of £239.0 billion at the end of January 2025.

 

• The funding ratio at the end of February 2025 was 126.1%, compared to 127.0% at the end of January 2025.

 

• Total assets were £1,124.1 billion and total liabilities were £891.4 billion.

 

• There were 1,278 schemes in deficit and 3,691 schemes in surplus.

 

• The deficit of the schemes in deficit at the end of February 2025 was £25.6 billion, up from £24.1 billion at the end of January 2025.

 

Funding comparisons

 

	February 2024	January 2025	February 2025
Aggregate funding position	£269.2bn	£239.0bn	£232.7bn
Funding ratio	128.7%	127.0%	126.1%
Aggregate assets	£1,207.1bn	£1,125.1bn	£1,124.1bn
Aggregate liabilities	£937.9bn	£886.1bn	£891.4bn
Dataset / Assumptions	Purple 23 / A11	Purple 24 / A11	Purple 24 / A11

The PPF 7800 index is published on the second Tuesday of every month, and the PPF publishes The Purple Book each year.