Media reports (including the previous issue of The People Bulletin!) suggesting that Labour's 1% rise in employer's national insurance contributions (NICs) has been abolished are not accurate, according to Catherine Robins, tax partner at Pinsent Masons. It is true that employers will pay less NICs in respect of low paid employees but there will still be an increase in NICs for employers of higher paid employees. Below we set out a technical briefing supplied by Catherine and the tax team at the law firm, as it is important that the differences between the effects of the NI changes on higher paid employees and lower paid ones are fully understood.
The Queen's speech
The Queen announced in her speech on Tuesday, 25 May 2010 at the official state opening of Parliament that a national insurance contributions bill will be introduced in the current parliament, which will confirm the measures outlined in the coalition agreement for increases to the rates of national insurance contributions from April 2011.
In summary, the main rate of employee's NICs will increase by 1% to 12% (with the additional rate for earnings above the upper earnings limit also increasing by 1% to 2%) and the rate of employer's NICs will also be increased by 1% to 13.8%. These increases are unchanged from those which were announced by the previous government. The threshold at which employers start paying NICs on earnings will be increased (probably by £21 per week, as proposed in the Conservative party's manifesto). The increased threshold will reduce (although not eliminate) the impact of Labour's 1% increase for employers. Basically from April 2011 employers will be paying more NICs in respect of anyone earning over about £20,000, but less NICs in respect of anyone earning less than this.
The Queen's speech confirmed that ‘under the full changes, most people would be better off relative to the previous government's plan, and relative to no changes, all low and middle income employees would pay less tax and NICs overall’. This is on the basis of the coalition's intention to raise the personal allowance for income tax purposes, which will be funded (at least in part) by the NICs increase. However, the speech does not make clear that employers of higher paid employees will still pay more NICs in the next tax year, although about £150 less than under the original Labour proposals.
High earners will also be worse off personally under the coalition proposals because they no longer get a personal allowance and so there is nothing to offset the increase in the employee's NICs rate. In addition to increasing the rates of NICs, the Queen's speech also mentioned that the purpose of the NICs bill is to ‘possibly make further changes that promote enterprise and fairness.’ It is not clear what these changes may be but there is some suggestion that one change may be the Conservative's suggestion of a NICs holiday for new businesses - meaning that in the first two years of the new government, new businesses would be allowed a one year break from paying NICs for the first ten workers they employ. Another change may be one of the Liberal Democrats' tax pledges to combat NIC leakage by changing the taxation of benefits in kind.
What it means in practice
For an employer employing someone earning £50,000 a year, the effect of the Labour 1% increase in NICs without the increase in threshold proposed by the government would be an increase of £443 in the employer's NICs. The government's threshold increase will mean that the increase in employer's NICs is reduced by about £150. However this still means an increase in the employer's NIC bill of nearly £300. The higher the salary the greater the increase will be, so for an employee earning £150,000 the employer's NIC bill will increase by nearly £1,300.
In contrast an employer of an employee earning £15,000 will pay about £57 less NICs than at present, but under the Labour proposals would have paid £93 more.
Share plan implications
As well as on base salary and any cash bonuses, the rise in NICs rates will also have an impact for many employees receiving benefits under share plans. On exercise of an option, or vesting of an award, NICs will be due on the amount of the benefit received by the participant - except where the exercise is tax exempt under an HMRC approved plan, or where private company shares are acquired for which there is no ready market. The increased employees' NIC rate will apply to add 1% to the overall tax/NIC liability (which, for high earners, will be in addition to the increased income tax rates already in force).
In addition, the employer's NIC costs can be transferred to a participant, and again the rate will increased by 1%. Although there is income tax relief for the cost of meeting the employer's NICs, the overall tax/NIC burden will increase for many executives.
In light of these proposed changes and the changes to income tax rates which came into force this year, many companies have been looking at implementing share plans which deliver reward in a capital form. However, we await further detail of the coalition government's proposals on CGT to assess what impact there may be on share plans going forward.
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