Employment taxes

National Insurance

From April 2009 the upper earnings limit (UEL) will increase from £40,040 to align with the level at which people begin to pay higher rate tax which will be £42,475 (after taking into account the personal allowance of £6,475 and the higher rate tax band of £36,000). 

From 6 April 2011 the primary NIC threshold will be broadly aligned with the tax threshold.  No figures were given, but if introduced at today’s rates the threshold would increase from £5,435 to £6,035.

From 2011/12 employees' NICs will increase from 11 per cent to 11.5 per cent and also the additional 1 per cent rate chargeable above the UEL will increase to 1.5 per cent.

From the same date the main employers' NICs (including Class 1A and 1B) rate will increase from 12.8 per cent to 13.3 per cent.

How this affects you

From 6 April 2011 the Government will effectively be collecting NICs at a rate of about 25 per cent (11.5 per cent + 13.3 per cent).

National Insurance and employee shares and salary sacrifice

The higher National Insurance rates and the 45 per cent income tax rate to apply from 6 April 2011 mean that unapproved share options and taxable Long Term Incentive Plans will be more costly for employers and employees from 6 April 2011.

The period until these rates are introduced in 2011 allows for planning:

  • individuals holding share options (in particular those earning over £150,000 per annum) may look to exercise options prior to 5 April 2011 and companies may want to accelerate vesting/exercise dates where this is possible
  • arrangements where employees receive share based payments subject to capital gains tax (taxed at 18 per cent) will be even more attractive.  This may be through the use of approved share schemes or qualifying Enterprise Management Incentive (EMI) schemes or other planning
  • employers who do not currently pass the employer’s NICs to employees may wish to reconsider their approach
  • companies implementing new plans may want to ensure that the tax point arises before the new rates are in place.

The 0.5 per cent rise in employer and employee NIC will make NI efficient salary sacrifice schemes (ie flexible benefit schemes, smart pensions, child care vouchers and bike schemes) even more appealing to employers and employees alike.

Employee shares and anti-avoidance

Existing provisions tax employees who acquire shares at less than market value on deferred terms, on a nil/partly paid basis or on a share capital reorganisation. The following changes will be introduced: 

  • if shares acquired on deferred terms are sold before the purchase price has been paid in full and the employee makes no profit on the shares, the current tax charge will no longer arise. However, if the employee's liability to pay for the shares is waived, tax will continue to apply
  • a similar change has been made in relation to shares that are "nil paid"
  • in certain circumstances, the participation in a bonus issue or a rights issue can give rise to a charge under the existing provisions. The rules will be amended such that this is corrected.

These changes will take effect from Royal Assent.

How this affects you

The precise detail of the changes will only be clear when legislation is introduced.  Early indications are that the circumstances in which a charge arises may change. If so, this would be helpful - for example on a reorganisation of share capital which currently gives rise to tax even if the employee receives no value. 

Company cars and disabled drivers

Currently disabled drivers who use a blue badge and drive an automatic car calculate their company car benefit in kind tax charge using the CO2 emissions figure and list price for that car.

From 6 April 2009 HMRC has announced such drivers can use the equivalent manual car in the calculation where this produces a lower tax charge than the automatic car. 

How this affects you

This will mean a lower benefit in kind for the employee and Class 1A NIC charge for their employer as automatic cars can typically be more expensive and have higher levels of CO2 emissions.