Will the new tax rules and proposed changes to flexible working laws act as an incentive for senior employees to reduce working hours?
On 17 November, borne out of the need to repair the public finances and a policy intent to ensure that those on the highest incomes take on a larger burden, the government confirmed that from 6 April 2023, the top rate income tax band will kick in from £125,140 rather than £150,000.
This dovetails with an existing tax hit that arises once employment income reaches £100,000, whereby every £1 of an individual’s personal allowance is withdrawn for every £2 of income above £100,000. This means that an effective rate of income tax of 60% would apply for income between £100,000 and £125,140, with income above that being taxed at 45%.
HMRC state that this measure will impact 792,000 taxpayers, of whom 292,000 are brought into the highest tax bracket. It also estimates that the measure will affect more men (606,000) than women (186,000) reflecting the fact that a higher proportion of men are higher earners.
These rates are unlikely to change over the coming years and continuing higher levels of inflation and pay rises will push more taxpayers into this band.
The Covid pandemic resulted in wide-ranging changes to working practices, with many employers embracing hybrid and more flexible methods of working, and many employees reflecting on their own particular work life balance. New Year is a time of reflection, and work-life balance is something that often features when it comes to making resolutions and thinking about positive changes.
It would be no surprise if this change to taxation is a decisive factor, if not a tipping point, for some senior staff to seek out flexible working arrangements to reduce their working hours to avoid the highest rate of tax, or avoid the cliff edge of £100,000. Under the tax regime outlined above, it could actually be considered to be more tax efficient for senior/highly paid employees to reduce their income through reducing their hours, as the percentage reduction in hours would not result in the equivalent reduction in pay.
To take two examples, for a full time employee earning £150,000, reducing their hours by 20% would take them out of the highest rate tax bracket. For an employee earning £125,000, reducing their hours to 4 days, would take them below £100,000, and by regaining the personal tax allowance they would benefit from a 20% reduction in hours for a 12.5 % reduction in pay.
All employees now have the statutory right to apply for flexible working, not just those who are parents or carers. Currently, employees must have 26 weeks continuous employment and may only make one request per year. However, the government has now published its response to the 2021 consultation on updating flexible working laws.
It is proposed that the right to request flexible working should be a right which applies from day 1, rather than after 26 week’s service. Senior employees often shy away from asking for flexible arrangements from the outset, waiting until their feet are under the proverbial table. This may change. It is also proposed that employees be able to make 2 requests within a 12 month period – currently they are limited to one. So a determined employee may persist until their employer is persuaded. The period for consideration of requests would be reduced from 3 months to 2 months, and it is also proposed that there would be a new duty to discuss alternatives to the request if it is refused.
An employer is able to refuse a request on one of 8 specified business grounds, and no change to this is proposed. However, this can be deceptive, as merely citing one or more reasons for refusing a request is not necessarily the end of the story. If an employer unreasonably refuses a request, it may well find itself on the receiving end of a claim for constructive dismissal or indirect discrimination. For highly paid employees, the stakes can be high.
The consequences of unreasonably refusing a request for flexible working were demonstrated recently by a high earning female sales manager who successfully won a claim of indirect sex discrimination against her employer, receiving nearly £185,000 in compensation.
The claimant in the case, Ms Thompson, was a very successful sales manager at a small firm of estate agents. She was contracted to work 5 days from 9am to 6pm, however when she returned from maternity leave she submitted a flexible working request to reduce her hours so that she could finish work at 5pm and work 4 days a week. She submitted this request to assist her with childcare responsibilities. Ms Thompson made suggestions as to how the new arrangement could work in practice, for example which colleagues could cover her management duties on her day off. The employer rejected the flexible working request, detailing a number of business reasons as to why they could not accommodate the change in hours.
Ms Thompson resigned and brought a number of claims in the Employment Tribunal, including indirect sex discrimination. The Tribunal upheld her claim, finding that the employer’s failure to consider the flexible working request put Ms Thompson at a disadvantage as she was unable to collect her child from nursery, which closed at 6pm. Whilst the Tribunal understood the employer’s business concerns, they considered the firm’s refusal of the flexible working request to be disproportionate to the firm’s business needs, and therefore found that it was discriminatory given that women are overwhelmingly the primary carers for children. Ms Thompson was awarded £184,961.32, which consisted of interest, past and future loss of income and pension contributions, and £13,500 for injury to feelings.
Aside from the huge costs that the employer had to pay out to Ms Thompson, what is perhaps most damaging to the firm is the widespread media attention this case received. Many national news outlets reported the case, including the BBC and the Independent, with headlines predictably portraying the firm in a negative light. The firm’s director was named in many of the articles, demonstrating the reputational damage to not only a business, but its leadership team and other employees.
If indeed more highly paid staff do see the opportunity to reduce their hours without a commensurate hit on pay, then employers should ensure that those requests are handled reasonably and properly and in a way which avoids indirect discrimination or enables a defence of justification. The employment team at Kuits have significant depth of experience in advising senior executives and employers in these circumstances and in bringing and successfully defending claims. For further advice please contact partner Sally Bird at sallybird@kuits.com.
