Tax, NICs and Salary Sacrifice
So far, 2010 has been an eventful year for payroll - a new coalition government was elected, the first emergency budget was held, the Liberals' policy of increasing the personal allowance for individuals has been accepted, and the former Labour tax on jobs (increased employers NICs), reversed... or was it?
If we look back to the 2008 Pre-budget report, the Labour Government confirmed a 1% increase to the rates of NICs to be applied from 2011/2012, as well as the employee’s contribution rising tos 12% and the employee's Primary Threshold (PT) to increase by a further £570.
Now moving forward, in the Budget statement of 22 June 2010, George Osborne announced an increase of the Personal Allowance by £1,000 to £7,475 and announced that the Secondary Threshold, the point where employer pay Class 1 NICs, would increase by an extra £21 per week above indexation. He did not reverse any of the prior announced NIC rate changes. Employees will pay 12% NIC between the PT and a lowered Upper Earnings Limits (UEL) which is to be aligned with the higher rate threshold.
What is the result of this change?
Some 800,000 employees may drop out of income tax altogether and another 600,000 employees drop out of NICs. Some employers will be better off with their NICs bill (especially those lower paid workers are lower paid) and for those who employ high earners, the NICs may potentially increase.
But, does this have implications elsewhere?
The answer has to be an inevitable YES. Employers are increasingly arranging their employee remuneration and benefits packets to maximum tax and NICs efficiencies. Such fundamental changes potentially impact this thinking.
Salary sacrifice and flexible benefits scheme
Change to salary sacrifice and flexible benefits schemes may now be a consideration for certain employers for the 2011/2012 tax year. Employees and employers may want to review their own circumstances to see if they are now better or worse off. For the lower paid, some of the former benefits may now be lost or just wiped out of the government’s tax and NIC handout to employees. For the higher paid, there may be good reason to push and promote better benefit tax and NICs efficient benefit policies in light of the 7.8125% increase on potential secondary NIC savings (the increase from 12.8% to 13.8%), and for the additional rate 50% tax holders to potentially reduce their tax liabilities.
Impact on Pension Schemes
A revision of tax efficiency on Pension Schemes (restricting to basic rate) is already a consideration and further detail is expected. Forestalling legislation is already in force in relation to both employee and employer contributions for those earnings over £130,000. This is where flex and salary sacrifice originated and is still a big winner.
Child Care Vouchers
In the case of Child Care Vouchers, which give both tax and NICs efficiencies but often carry significant admin charges, will all employees who receive them now benefit? If the employee no longer has any NIC contributions and no tax liability, then all the efficiencies of their provision are lost. Equally with increased Secondary Threshold, some employers will not gain any additional NIC savings but just incur administrative cost alone.
Bike schemes operate often on a three year programme, where the employer lends bikes to employees for the agreement to take a contractual cut in pay. Some employees may now see no benefit in keeping the bike they already have or taking a new bike if there is now Tax and NICs savings. Equally some employees may, with the aid of certain sacrifices, now take themselves out of any tax and NICs liabilities.
Where the predominant workforce is low paid, the employer will need to consider the negative impact this may have on savings when operating certain flex and salary sacrifice benefits. For employees who earn over the Secondary Threshold (with a 7.8125% increase in the employer NIC rate) and employees who earn over the revised Primary Threshold (with a +9.09% increase in the employee contribution rate), it may be time to take advantage of Tax and NICs efficient schemes to avoid this “tax on jobs”.
Tax and NICs efficiency is not all about Flex or Salary Sacrifice, with Share Option Plans (SAYE) savings bonuses virtually at zero, it is time for employers to consider promoting the much more tax and NICs efficient Share Incentive Plans to their workforce, potentially a big winner for both the employee and employer.
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