Role restructuring to save employer NICs is risky warns lawyer

As you will be aware, the headline from last month’s Budget was the rise in employer National Insurance contributions from 13.8% to 15%, a rise of 1.2%. On top of that the Chancellor Rachel Reeves also announced that the NICs threshold will drop from around £9,000 to £5,000, meaning an extra £4,000 of each employee’s income will be taxed at the new rate. Together, these changes could significantly raise costs for employers, particularly those with a big headcount. Employers are now actively looking at strategies to mitigate the impact of that NICs rise – we flagged salary sacrifice as one of the best in our programme of 7 November – but another doing the rounds is role restructuring, moving work away from full time employees who carry the highest employer NICs burden. In theory it could save costs but, as we’ll hear, it is a strategy that carries a significant risk. We’ll speak to an employment lawyer who is warning clients to tread carefully.

In response to the Budget, many companies are now looking for ways to cut costs without resorting to the nuclear option of reducing headcount. A number of commentators, including a handful of law firms and accountancy firms have been pushing the idea of role restructuring as a means of achieving that. The idea is that by reducing reliance on full-time employees, without necessarily losing them from the business, the employer can save on employer NICs. So by increasing the use of part-time roles, flexible working and outsourcing certain functions you can lower overall payroll costs and, in turn, reduce the employer’s NIC liability. 

Whilst that strategy could save NICs costs it does come with significant risks which means it may well create more problems for the business than it solves. So let’s hear more on that. Earlier I caught up with employment lawyer Emma Johnston who joined me by phone from Edinburgh. I put it to Emma that this strategy comes with a warning:

Emma Johnston: “Absolutely, and, and this is something that comes up time and again, not necessarily just in relation to employer national insurance hikes but for various reasons. Clients are often coming to us and asking, well, actually, if we take out this permanent employment position and we change it up and we restructure it so we're bringing in a consultant, or something like that, that would ease the burden in terms of increased employer national insurance contributions in this case. Unfortunately, it's not quite as simple as that and as is often the case where you try to quell or mitigate one particular risk or cost burden, you then create exposure in another form and we can very much anticipate that in this scenario based on the fact that employment status is a particularly thorny area. If what you're doing is changing an employee's role with the intention of creating a sort of self-employed or consultant role instead, then there has to be a really genuine and fundamental change to the way in which that work is undertaken. There are numerous rules in place in order to prevent, effectively, employment in disguise. For example, IR35 where someone is working through their personal service company and they're engaged by the business, there will need to be an assessment made as to whether that work is effectively deemed employment and, if so, then PAYE obligations etcetera will arise. There’s also the employment status angle which we see sometimes crop up where someone can be engaged as a self-employed contractor for a lengthy period of time and then if it comes to the end of that engagement the individual then challenges their status and argues that they were, in fact, an employee all along. So the main factors that have to be considered when restructuring employment positions with a view to trying to remove the burden of these increased employer national insurance contributions, the focus has to be assessing the extent of the control which is exerted by the company over the individual in terms of how they carry out that work, whether there is a requirement for that individual personally to do the work, and the extent to which there is mutuality of obligation, so the requirement for the company to provide work, the requirement for the individual to undertake that work and for the company to pay for that. So, those are the three crucial aspects of determining employment status and, of course, that can be broken down into many features of an engagement including whether the work is consistently available, whether the arrangement is a long term thing or just specific to a particular project, whether the individual is in control of when and how they do the work, and whether they use their own tools and equipment and have their own insurance cover and so on. These are all critical factors in terms of determining whether an individual is likely to be considered an employee, as opposed to a self-employed contractor or something similar.”

Joe Glavina: “So in summary, Emma, your message is: this is fraught with risk so tread carefully.”

Emma Johnston: “I think that's right. If you were to do a whole restructure of a lot of roles to try and avoid the issues that may arise from additional cost in relation to this change, it's likely that you might find that more problems are created than solved through that avenue.”

So as you’ll have gathered, that is a strategy is risky so do take legal advice before embarking down that road. A safer and better alternative, we suggest, is around using salary sacrifice especially when it comes to pension contributions and that is a strategy a number of our clients are looking at closely. Tax expert Chris Thomas talked to this programme in detail about that in the week after the Budget. That’s ‘Salary sacrifice can help UK firms mitigate NICs rise, says tax lawyer’ and it is available for viewing now from the Out-Law website. We’ve included a link to it in the transcript of this programme.

 - Link to HRNews programme: ‘Salary sacrifice can help UK firms mitigate NICs rise, says tax lawyer’