Employment Taxation changes

Issues

Further rise in the rate of National Insurance

The Chancellor announced a further 0.5 per cent hike for national insurance across the board for employees, employers and the self employed.  This will apply from April 2011 and comes on top of the 0.5 per cent rise already announced only a year ago in the 2008 Pre-Budget Report.

The new rates for 2011/12 will rise to 12 per cent for employees, 13.8 per cent for employers and nine per cent for the self employed (for employees and self employed earning over £43,875 per year the rate on amounts over that limit will be capped at two per cent rather than one per cent). These measures represent the principal tax collection announcement in the Pre-Budget Report and will collect an additional £6bn for the Treasury.

Freeze on personal allowances

The Chancellor stated in today’s PBR that the freeze on all personal allowances for 2010/11 will still provide taxpayers with a “real terms benefit” as these allowances have not been reduced in line with negative inflation.  How many taxpayers will consider this to be a benefit is easy to guess.

It was announced that allowances will remain at 2009/10 levels with the personal allowance being £6,475, age related allowances £9,490 for those between 65 and 74, and £9,640 for those aged 75 and over.

A freeze on personal allowances typically saves HM Treasury around £2.2bn, indeed on this basis, this would represent the largest effective tax increase after the national insurance increases.

There’s bad news for banks

As expected the Chancellor announced a temporary (initially from today to 5 April 2010) bank payroll tax of 50 per cent to be due from certain financial sector employers on discretionary bonuses above £25,000 per employee.

Comments

Sadly, significant national insurance rises are an unsurprising response to the £175 bn plus deficits announced for both 2009/10 and 2010/11 in the Chancellor's Pre-Budget Report. Together with VAT and income tax, national insurance is one of the three largest tax collections and the changes were rather predictable.

A freeze on personal allowances was widely expected and the Government has claimed that the country’s negative RPI will, in real terms, mean that taxpayers still enjoy a net benefit.  However, many taxpayers would have expected at least a small increase in personal allowances as some prices are still increasing such as petrol, utility bills and council tax. Arguably, this impact is likely to be felt most by families on low incomes.  

In essence, freezing personal allowances is effectively a stealth tax as taxpayers focus more closely upon the rates of income tax, national insurance and VAT.

The introduction of the ‘bankers bonus’ is bad news for the competitive position of the UK financial services sector. At the margin, this will discourage financial services executives from transferring to London as they may consider that a short term tax rate could be continued.  Similarly, London's competitors in financial services such as Paris, Frankfurt and Switzerland will exploit the measure as a further example of an increasingly less friendly tax regime in London for global financial services businesses. In essence, the £550m forecasted tax revenues will not be worth the long term price paid for them.