PFS What's new bulletin - November II

PFS WHAT’S NEW BULLETIN

UPDATE from 15 November 2024 to 28 November 2024

TAXATION AND TRUSTS

Consultation outcome re umbrella companies

(AF1, RO3)

 

Umbrella companies are employment intermediaries that employ workers on behalf of agencies and end clients. The agency will then provide the services of the worker to their clients. Most umbrella companies employ workers using an employment contract which will set out their terms and conditions.

 

This means the company must comply with employment law. If a worker is employed by an umbrella company, the tax rules on agency workers and off-payroll working (IR35) will not apply to that worker. The umbrella company will pay the worker for the work they do for the employment agency’s clients and deduct any income tax and employee National Insurance contributions due under PAYE from their pay. The end client pays the agency for the worker’s services. The agency deducts a fee for placing the worker with the end client and pays the rest of the money (sometimes known as the assignment rate or the limited company rate) to the umbrella company.

 

On 30 October 2024, the Government published its Policy Paper ‘Tackling tax non-compliance: umbrella company market’.

 

This goes back to November 2021, when the Treasury launched a call for evidence on the umbrella company market. In June 2023, over 15 months after that consultation closed and 400 plus responses later, the Treasury issued a summary of the evidence it received together with another consultation document ‘Tackling non-compliance in the umbrella company market’.

 

In April 2024, the previous Government published its Spring 2024 Tax administration and maintenance summary, which included a statement that simply reiterated its ongoing "concern" about non-compliance in the umbrella market and its detrimental impact on workers, taxpayers and the labour market. The then Government mentioned publishing a response to last summer's consultation "in due course" and releasing new guidance for workers “later this year”. And it said that guidance would include “an online pay checking tool to help umbrella company workers to check whether the correct deductions are being made from their pay”. It added that it was "minded to introduce a due diligence requirement to drive out bad actors from labour supply chains” and that it planned to engage further with stakeholders on the details to “ensure it has the best understanding of the impacts that this could have on reducing non-compliance”. 

 

The current Government’s Policy Paper says that umbrella companies were used to engage at least 700,000 workers in 2022/23. This analysis also shows that at least 275,000 of these workers, and likely significantly more, were engaged at some point in 2022/23 by umbrella companies that failed to comply with their tax obligations. HMRC data shows that £500 million was lost to disguised remuneration tax avoidance schemes in 2022/23, almost all of which was facilitated by umbrella companies. Hundreds of millions more was lost to so called ‘mini umbrella company’ fraud and other fraudulent attacks by people abusing umbrella company structures.

 

The Government will therefore bring forward legislation to change who has responsibility to account for Pay As You Earn (PAYE) where an umbrella company is used in a labour supply chain to engage a worker. This will move the responsibility to account for PAYE from the umbrella company that employs the worker to the recruitment agency that supplies the worker to the end client. Where there is no agency in a labour supply chain, this responsibility will sit with the end client. This will take effect from April 2026.

 

The Government will introduce legislation to make agencies that use umbrella companies to employ workers responsible for ensuring that the correct income tax and National Insurance contributions (NICs) are deducted and paid to HMRC. This will mean that the agency that supplies the worker to the end client will be legally responsible for operating PAYE on the worker’s pay and will be liable for any shortfall, whether they operated their payroll themselves or used the umbrella company to run payroll for them. If there is no agency involved in the supply of the umbrella company worker, this responsibility will be placed on the end client itself.

 

This measure will only change where tax obligations sit when using an umbrella company to pay a worker. The underlying tax and NICs liabilities will not change and PAYE will operate in the usual way. This will make the tax position for workers employed by umbrella companies the same as for other agency workers. Legislation has been in place since the 1970s to treat most agency workers as employees for tax purposes. Since 2014, where this legislation applies (Chapter 7, Part 2 of the Income Tax (Earnings and Pensions) Act 2003), responsibility for operating PAYE on payments to agency workers is placed on the agency that supplies the worker to the end client. This legislation does not apply if an umbrella company is used to employ a worker. One of the reasons that the umbrella company model has become more popular is because they are used to sidestep the obligations arising from this legislation. By making the same agency responsible for PAYE when an umbrella company is used, this measure will make PAYE obligations consistent for agency workers regardless of how they are engaged.

 

The Government says that it understands that some businesses, particularly smaller agencies, value the ability to outsource the administrative obligations of employment to umbrella companies and that it also recognises the positive role that compliant and well-managed umbrella companies and payment intermediaries can play in the functioning of the temporary labour market. This measure is not intended to prevent businesses from continuing to use umbrella companies or other payment intermediaries to operate payroll on their behalf as they do now. This measure is intended to ensure that while businesses can continue to do this, they will no longer be able to outsource the underlying PAYE obligation and will be ultimately responsible if the umbrella company operating payroll on their behalf fails to do so correctly.

The Government anticipates that businesses that continue to outsource payroll operation to umbrella companies will take steps to ensure that these obligations will be correctly met on their behalf. This could include undertaking due diligence checks or putting in place legal indemnities.

 

This measure will apply to agencies that supply workers directly to end clients. This means that where there are multiple agencies involved in the supply of a worker paid by an umbrella company, it will be the agency that has a contractual relationship with the end client that becomes responsible for accounting for PAYE.

 

Agencies operating PAYE will withhold income tax and NICs before making payments to the umbrella company employing the worker, or any other intermediary between them and the umbrella company, remitting these sums to HMRC and preventing umbrella companies from failing to pass sums that should be withheld from workers’ pay to HMRC. Agencies will also be responsible for the payment of employer NICs.

 

Where an agency chooses to outsource operation of payroll to the umbrella company that employs the worker they are supplying, PAYE will be operated by the umbrella company on behalf of the agency and the agency will be liable for any shortfall.

 

In the majority of cases, the Government understands that workers employed by umbrella companies are supplied to end clients by an agency. However, if the end client is in a direct relationship with the umbrella company, then the end client will be responsible for accounting for PAYE. It will be for the end client to decide whether it will operate PAYE itself or will choose to outsource this to the umbrella company.

 

Umbrella companies will no longer be legally responsible for operating PAYE on payments to the workers that they employ.

 

Workers will continue to receive their pay net of income tax and NICs following the introduction of the measure, although the business providing their payslip may change. By reducing non-compliance in the umbrella company market, this measure should prevent workers from being engaged by non-compliant umbrella companies.

 

Next steps

 

This measure will take effect from April 2026. The Government will set out full details of how this measure will operate in the coming months, alongside draft legislation ahead of its introduction to Parliament as part of Finance Bill 2025. The Government will engage with stakeholders to ensure that they have the opportunity to provide feedback on the Government’s detailed proposal. The publication of draft legislation will also be accompanied by a Tax Impact and Information Note. The Government will also publish technical guidance for businesses that will be affected by it. In the meantime, the Government will shortly publish an online tool to help workers and agencies understand pay from umbrella companies, as well as further guidance.

 

The Government and HMRC will work in partnership with businesses and the recruitment sector, including the compliant umbrella companies that want to clean up the market, to deliver this reform for the start of the 2026/27 tax year.

 

 

 

 

INVESTMENT PLANNING

 

Recent changes announced that have an impact on shares schemes and other Employment Related Securities

(AF4, FA7, LP2, RO2)

 

Private Intermittent Securities and Capital Exchange System (PISCES)

 

Earlier this year, the previous Government published a consultation about its proposal for this system. It’s a new type of regulated trading platform that allows for the intermittent trading of private company shares on a multilateral system. The consultation response has now been published, alongside draft legislation to show how the Treasury intends to set up the PISCES regulatory regime.

 

As set out in the consultation response, several respondents asked for clarity on how tax-advantaged employee shares schemes, such as Enterprise Management Incentives (EMI), would interact with PISCES. The current Government is considering this feedback further and will provide greater clarity in due course. As part of this, it would welcome further engagement with stakeholders on the interaction between PISCES and EMI. Interested stakeholders can contact the Treasury’s PISCES team at: PISCES@hmtreasury.gov.uk.

 

Non-domicile reform

 

From 6 April 2025, the remittance basis of taxation will be replaced by a new tax regime based on tax residence. The concept of domicile as a relevant connecting factor in the UK tax system will be removed. Please see Tax changes for non-UK domiciled individuals policy paper and technical note Reforming the taxation of non-UK domiciled individuals.

 

Overseas Workday Relief (OWR) is an income tax relief available to UK resident non-UK domiciled employees on employment income paid and kept offshore and related to days spent working abroad as part of their UK employment. From 6 April 2025, as part of the non-domicile reform, eligibility for OWR will be based on an employee’s residence and not their domicile. Where an employee is eligible for the new Foreign Income and Gains (FIG) regime in a tax year, they can make an OWR election which will allow them to make a claim for relief. OWR will continue to apply to certain types of employment income, including Employment Related Securities income.

 

From 6 April 2025, for all Employment Related Securities and Employment Related Securities options, the calculation of Foreign Securities Income will be modified for any part of the relevant period that falls after this date, regardless of the date the security or option was granted. Where the income is apportioned to a tax year in which an employee is eligible for new OWR ‘a qualifying year’, this income will no longer be treated as Foreign Securities Income and instead will be treated as ‘Securities Income’. The employee may then be able to obtain relief on this income, which relates to duties performed outside the UK in a qualifying year, separately through OWR.

 

The calculation of Foreign Securities Income for any part of the relevant period before 6 April 2025 is unchanged, with the remittance basis rules continuing to apply.

For more information about Foreign Securities Income please see here.

Neonatal Care (Leave and Pay) Act 2023

 

Neonatal care leave and pay is being introduced to provide up to 12 weeks of paid leave and pay for parents of babies who require neonatal care. It is available if a baby has received medical or palliative neonatal care for at least seven consecutive days within the first 28 days after birth.  

 

Employers will now be required to add ‘statutory neonatal care pay’ to the list of statutory benefits or payments in the notice that employers must provide employees when entering a Share Incentive Plan (SIP). This notice informs employees of the effect that deductions from salary for the purchase of SIP partnership shares, may have on entitlement to statutory benefits/payments. This only applies to new contracts issued from 6 April 2025.

 

Carried interest taxation reform

 

The Government announced at Autumn Budget 2024 that it will reform the way carried interest is taxed.

 

From April 2026, all carried interest will be taxed within the income tax framework, with a 72.5% multiplier applied to qualifying carried interest that is brought within charge. As an interim step, the two capital gains tax rates for carried interest will both increase to 32% from 6 April 2025. The Government will also consult on introducing further conditions of access into the regime. More details are set out in the summary of responses and next steps document. This includes details of how to participate in the consultation which runs until 31 January 2025.

 

Capital gains tax (CGT) — tax rates and other changes

 

One of the measures announced at Autumn Budget 2024 which relates directly to CGT was changes to the CGT rates. The lower and higher main rates of CGT have increased to 18% and 24% respectively for disposals made on or after 30 October 2024.

 

If shares acquired through a share scheme, whether a tax-advantaged scheme or other scheme, are sold or disposed of, CGT may need to be paid.

 

With the change to CGT rates, individuals will now need to pay CGT on the amount of their gain above the Annual Exempt Amount for disposals made on or after 30 October 2024 at a rate of:

 

• 18% for any gains that fall within their unused basic rate tax band;
• 24% if they are a higher- or additional-rate taxpayer.

 

Individuals must report capital gains on their self-assessment tax return and pay any CGT by 31 January following the end of the tax year in which the gain was made.

HMRC says that, as the rate change has happened in-year, it will provide guidance and tools to support taxpayers to calculate and report the CGT that is due. If an individual is not already in the self-assessment system, they will still need to notify HMRC of the gain.

 

 

PENSIONS

 

Consultation: Pensions Investment Review: Unlocking the UK pensions market for growth

(AF8, FA2, JO5, RO4)

 

Following on from Chancellor Rachel Reeves’ Mansion House Speech, the DWP and HMT have issued a consultation document entitled: Pensions Investment Review: Unlocking the UK pensions market for growth. These proposed reforms, aimed at consolidating Local Government Pension Scheme (LGPS) assets and Defined Contribution (DC) schemes into "megafunds," seek to unlock billions of pounds for investment in infrastructure and high-growth sectors, whilst enhancing governance and economic growth. Separately, Pension Policy Institute (PPI) has prepared a helpful PPI Digest, explaining the changes that will impact pensions.

 

Below is a detailed synthesis of the main findings and implications of these changes:

 

1. Creation of LGPS Megafunds

 

The reforms propose pooling the assets of the 86 LGPS authorities into a handful of megafunds, enabling larger-scale investments. Currently, LGPS funds collectively manage over £300 billion, expected to grow to £500 billion by 2030. However, their fragmented structure limits the ability to invest in large-scale infrastructure and private equity projects.

 

Key Benefits:

• Enhanced Investment Scale: Consolidation mirrors successful models in countries like Canada and Australia, where pension funds invest significantly more in infrastructure and private equity.
• Economic Impact: Unlocks around £20 billion for local investments and £80 billion for broader infrastructure and high-growth businesses.
• Improved Governance: Professional fund managers will oversee megafunds, replacing local government officials, ensuring better investment decisions.

 

Challenges and Risks:

• Transition Costs: Selling illiquid assets to align with pooled fund strategies may impose significant short-term costs.
• Governance Conflicts: Trustees may face tensions between maximising member returns and meeting government-mandated investment targets.
• Local Autonomy: Reduced flexibility for local councils to make investment decisions aligned with community needs.

 

Sustainability Concerns:

• The mandate for 5% local investment (about £20 billion) risks forcing schemes into less optimal investments if high-quality local assets are unavailable. This could pressure employers (often local councils) and taxpayers to address funding shortfalls.

 

2. Minimum Size Requirements for Defined Contribution Schemes

 

The government intends to consolidate DC schemes by imposing minimum size thresholds for default pension funds. With DC assets predicted to reach £800 billion by 2030, this reform aims to enhance value for money (VfM) and governance.

 

Expected Outcomes:

• Reduced Fragmentation: From 60 current multi-employer schemes, the market could consolidate to fewer than 30 default funds by 2030, concentrating assets into funds exceeding £25 billion.
• Global Comparisons: Evidence from Canada and Australia highlights that pension funds managing over £25 billion achieve higher productive investment levels and lower management costs.
• Increased Returns: Larger funds can invest directly in infrastructure and private equity, reducing intermediary costs and improving returns.

 

Trade-offs:

• Fairness: While larger funds may offer better VfM, they reduce employers' flexibility to offer customised default strategies.
• Market Disruption: Smaller providers may exit, with limited gains for smaller scheme members. Approximately 80% of DC assets are already managed by the seven largest providers.

 

Sustainability:

• Transitioning to fewer, larger funds could marginally improve returns but may undermine the viability of smaller providers and their associated insurance products.

 

3. Mandating Local Investment Targets

 

Each LGPS administering authority will be required to allocate at least 5% of pooled assets to local investments, representing £20 billion of potential funding for local economies.

 

Benefits:

• Economic Growth: Local and regional infrastructure projects stand to gain significantly, driving job creation and community development.
• Public Services: Long-term cost savings could free up additional funding for public services.

 

Concerns:

• Investment Quality: A lack of high-quality local opportunities may lead to poorer returns, impacting scheme sustainability.
• Employer Liability: Deficit funding may increase for employers (local councils), potentially burdening taxpayers.
• Reduced Trustee Autonomy: Mandated allocations may limit trustees' ability to pursue investments solely in members' best interests.

 

 

 

 

4. Comparative Analysis and International Lessons

 

Evidence from international pension systems provides a benchmark for the proposed reforms:

 

• Canada: Pension schemes invest four times more in infrastructure than UK DC schemes.
• Australia: Pension funds invest three times more in infrastructure and ten times more in private equity, benefiting from economies of scale.
• Netherlands: Studies show limited VfM improvements for schemes exceeding £0.5 billion in assets, suggesting diminishing returns from consolidation.

 

5. Implications for Scheme Members

 

The changes aim to enhance retirement savings for millions, particularly low-income workers, by improving returns and lowering costs. However, risks of homogenised investment strategies and reduced choice could disadvantage certain members.

 

Adequacy:

• Short-term Risks: Quick asset transitions may reduce returns temporarily.
• Long-term Benefits: Greater investment scale could generate higher returns, improving pension outcomes.

 

Fairness:

• Homogeneity: A more uniform approach to investment may benefit some members but restrict others' customised needs.

 

Sustainability:

• Local and Environmental Investments: Achieving sustainability depends on the availability of high-quality, UK-based investment opportunities.

 

Conclusion

 

The proposed reforms represent the most significant changes to the UK pension system in decades. While hey promise to unlock substantial investments, boost economic growth, and enhance retirement outcomes, their success hinges on careful implementation. Balancing governance improvements, member interests, and government-driven mandates will be critical to mitigating risks and ensuring long-term sustainability.

 

 

 

 

 

 

 

 

 

TPR publishes compliance and enforcement policy for CDC pensions

(AF8, FA2, JO5, RO4, AF7)

 

The Pensions Regulator (TPR) has published its new compliance and enforcement policy for collective defined contribution (CDC) pension schemes, laying out its risk-based regulatory approach and how providers can expect TPR to supervise them. Under new powers, TPR can issue risk notices when it is concerned a CDC scheme is not being effectively run, governed or funded.

 

The policy outlines the comprehensive supervision and enforcement policy for collective defined contribution (CDC) schemes, as mandated by the Pension Schemes Act 2021 and supporting regulations. CDC schemes, described in legislation as ‘collective money purchase schemes,’ are a distinct pension model where contributions are pooled and managed collectively, offering members benefits based on a target rather than guaranteed outcome. The policy aims to ensure these schemes are effectively governed, meet authorisation criteria, and maintain compliance to protect members' interests.

 

1. Authorisation and Supervision Requirements

CDC schemes must secure authorisation before operating, demonstrating they have qualified personnel, robust systems, continuity plans, and financial resources to safeguard members. TPR oversees these schemes to confirm ongoing adherence to authorisation standards and compliance with broader legal and regulatory obligations. This supervision supports the overarching objective of enhancing the operation of workplace pension schemes and swiftly identifying and managing risks.

 

2. Key Principles of Supervision

TPR employs five main principles in supervising CDC schemes:

• Engaged and Responsive: Understanding challenges faced by CDC schemes.
• Proactive and Forward-looking: Taking early actions to prevent harm to members, which may include enforcement measures.
• Strategic and Targeted: Addressing systemic issues in the pension landscape through focused regulatory measures.
• Proportionate and Risk-based: Monitoring the market, focusing on significant emerging risks.
• Consistent: Applying a uniform approach to similar situations.

 

The supervision involves a collaborative stance, with an emphasis on dialogue and the exchange of data to support thorough understanding and pre-emptive measures against potential issues.

 

3. Expectations for Scheme Operators

Operators of CDC schemes are expected to:

• Maintain transparency and timeliness in interactions with TPR.
• Proactively inform TPR of significant developments and potential risks affecting scheme operations.
• Provide evidence to demonstrate continued compliance with authorisation standards.
• Identify and mitigate risks early and present resolution plans when necessary.

 

Operators must also show that their trustees uphold standards of integrity and competence. Effective communication with scheme members, especially regarding potential changes to benefits, is essential.

 

4. Monitoring and Evaluation

Supervision incorporates:

• Periodic evaluations to check compliance with authorisation criteria.
• Reviews based on thematic concerns or specific market risks.
• Analysis of regular submissions, such as viability certificates, annual reports, and specific member communications.

 

Interaction methods include face-to-face meetings, site visits, and scheduled phone calls, particularly for schemes under intense supervision or when concerns arise. These meetings aim to build mutual understanding and address emerging risks effectively.

 

5. Regulatory Powers and Enforcement Measures

TPR can invoke statutory powers as part of its supervisory role:

• Pause Orders: Temporarily limiting scheme activities during high-risk periods.
• Risk Notices: Issued when there is concern about potential breaches of authorisation criteria, prompting corrective action plans from trustees.
• Civil Penalties: Applicable if trustees do not comply with risk notices or fail to implement plans properly.

 

The Determinations Panel, an independent body, can make critical decisions such as withdrawing a scheme's authorisation or issuing pause orders to protect members’ interests.

 

6. Interaction and Compliance

CDC scheme trustees are expected to collaborate actively with TPR. This entails attending periodic meetings, responding to requests for information, and demonstrating ongoing compliance. The supervision framework emphasizes the importance of open channels for communication, with allocated contacts fostering direct and transparent relationships.

 

7. Consequences of Non-compliance

Non-compliance can lead to significant consequences, including:

 

• De-authorisation: If a scheme fails to meet required standards, TPR can initiate de-authorisation procedures.
• Enforcement Actions: Escalated regulatory interventions may follow if breaches or failures are not rectified in a timely manner.
• Publication of Regulatory Findings: Reports may be made public to educate and deter non-compliance.

 

8. Review and Adaptation

The policy framework is subject to review to incorporate lessons learned, adapting the supervisory approach based on evolving challenges and best practices in scheme governance.

 

 

 

 

 

PPF: Responsible Investment Report 2023/24

(AF8, FA2, JO5, RO4, AF7)

 

The Pension Protection Fund (PPF) has published its Responsible Investment Report 2023/24. The report outlines substantial progress and strategic development in responsible investment practices over the past year. This report showcases PPF’s commitment to sustainability, governance, and effective stewardship to safeguard the financial future of defined benefit pension scheme members in the UK.   Some of the main outcomes and strategic initiatives include:
Purpose and Investment Approach: The PPF’s mission is to protect members of defined benefit (DB) pension schemes in the event of an employer's insolvency. The fund is sustained through levies, investments, and asset recovery. It manages assets amounting to £32 billion, employing a comprehensive strategy that divides its portfolios into a Matching portfolio for current funding needs and a Growth portfolio for future sustainability.
Governance and ESG Integration: The report highlights strong governance as a core component of the PPF’s responsible investment strategy. Oversight from the PPF Board, Investment Committee, and ESG & Sustainability team ensures that Environmental, Social, and Governance (ESG) considerations are embedded across all investment activities. The PPF’s dedication to the Stewardship Code is evident, having been recognised as a signatory for three consecutive years.
Climate and Sustainability Initiatives: The PPF prioritises climate action, including monitoring climate risks through its Climate Watchlist and engaging with companies to enhance their Net Zero disclosures. In 2023, 90% of companies on this list reported emissions to the CDP, with significant progress noted in reporting quality. The PPF also introduced a Climate Change Adaptation Strategy and conducted sustainability risk assessments to align with broader climate objectives.
Engagement and Voting: The report underscores the PPF’s active stewardship, demonstrated by engagement with 667 companies in 2023/24 and progress on 49% of its engagement objectives. The PPF adopted a new formal escalation strategy for cases where company engagements did not achieve desired outcomes. This strategy includes potential measures such as co-filing shareholder resolutions or recommending disinvestment from certain companies.
Transparency and Reporting: Transparency is a pillar of PPF’s responsible investment strategy. The PPF commenced full disclosure of its proxy voting records and rolled out monthly ESG reporting across key portfolios. The eFront® ESG Data Service project* notably improved data coverage in private markets, enhancing the PPF’s ability to monitor and report carbon emissions.   * The eFront® ESG Data Service is a solution developed by BlackRock's eFront platform to enhance the collection, analysis, and reporting of Environmental, Social, and Governance (ESG) data for private market investments. This service provides a standardized framework for gathering ESG metrics, enabling investors to monitor and assess the sustainability performance of their portfolios effectively. By integrating ESG data into investment processes, the eFront® ESG Data Service supports informed decision-making and helps investors meet evolving regulatory and disclosure requirements.
Diversity, Inclusion, and Community Impact: The PPF’s commitment extends to fostering diversity and inclusion within its workforce and among its external asset managers. Initiatives included engaging in employee-led diversity programmes and assessing diversity metrics during asset manager reviews. The report also detailed progress in its employee engagement survey, reflecting high satisfaction and a positive workplace culture.
Awards and Recognition: In 2023, the PPF’s efforts were recognised with multiple accolades, including the UK Pension Fund of the Year at the IPE Awards. It was also commended for its commitment to ESG in various categories, showcasing its role as a leader in the industry for responsible investment and sustainability practices.
Progress and Future Aspirations: The PPF has made significant strides in responsible investment over the past year, expanding its stewardship activities and deepening ESG integration across asset classes. The introduction of the Transition & Sustainable Assets Questionnaire for private markets and the increased use of ESG data tools like MSCI’s Climate Lab Enterprise demonstrate a commitment to continual improvement. Looking forward, the PPF plans to build on these achievements by extending ESG data coverage, enhancing its climate risk analysis, and fostering collaborative industry engagements. The commitment to sustainability is further reinforced through its aspiration to support the United Nations Sustainable Development Goals (SDGs) and align its activities with global best practices.