The chancellor unveiled a package of measures in his Pre-Budget Report on 9 December 2009 in a bid to make a dent in the £178bn public borrowing mountain while maintaining acceptable public service provision. Those likely to cause headaches for employers include:
1. National insurance. Heralded as a ‘tax on jobs’, national insurance contributions rise by 0.5% from 6 April 2011 for employees, employers and the self-employed, on top of what has already been a 0.5% rise announced last April also scheduled to take effect from 6 April 2011 affecting those earning around £44,000 or more. – bringing the tax increase for ‘high’ earners up by one full percentage point. Those earning under £20,000 a year will not, however be affected.
2. Income tax personal allowances. All thresholds have been frozen at current thresholds for the 2010/2011 tax year with higher rate tax thresholds frozen again from 2012/2013. With allowances having pretty well kept track with inflation rates rather than wage rises, many of those currently earning around £40,000 a year or just under will be paying 40% tax. The chancellor has also reduced personal allowances for incomes over £100,000 and scrapped them altogether on incomes above £112,950 with effect from 5 April 2010.
Karen Thomson, Associate Director of Policy at the Institute of Payroll Professionals told The People Bulletin: ‘Obviously the National Insurance hikes will mean changes to software, however more of a concern is the changes to tax allowances. Although this will not directly impact payroll as HMRC will operate using the Self Assessment (SA) tax system, it will be important for the higher earners to understand that they may not be paying the correct amount of tax at the time it is due, but more so have a tax bill after the submission of their SA returns.’
3. Income tax rates. A new 50% top rate of income has been introduced for those earnng over £150,000 per annum effective from April 2010.
Windfall tax. A bonus tax will be paid by banks on discretionary individual bonuses that exceed £25,000 This means that, if a bank pays an individual a bonus of £30,000, it would pay a 50% tax on the £5,000 portion over the threshold. The individual's income tax wouldn't be affected. The new tax applies only to discretionary bonuses. Banks will avoid the charge for payments to any banker whose bonus is guaranteed by contract.
Fiona Bolton of Eversheds pointed out: ‘It is not always straightforward to establish whether or not a bonus is contractual or discretionary and there is often a fine distinction; who will make the decision as to whether or not a bonus is "discretionary" for these purposes? Further, over recent years, a body of case law has grown up surrounding the exercise of employer discretion in awarding bonuses; in essence, employers must exercise any discretion in good faith and not capriciously or irrationally. Before making bonus decisions, banks would be wise to consider carefully how they exercise any discretion in the wider context and the context of any internal guidelines, rules or practices that might be in place, and not just in the context of the temporary payroll tax.’
4. Pension tax allowances. Some high earners have been using workplace salary sacrifice schemes to reduce their earnings to below the £150,000 threshold by having employers make pension contributions in lieu of salary. The chancellor has closed this loophole so that the pension contributions ‘count’ as gross income, affecting ‘ those with gross incomes of £150,000 and over, where gross income incorporates all pension contributions, including the value or any pension benefit funded by, or eventually by, an individual's employer’. However, ‘those with pre-tax incomes, excluding the value of any employer contributions, of less than £130,000 are unaffected’.
For more information on how the anti-forestalling mechanism introduced in the April 2009 budget works, see Simon Parsons’ (Legislation Manager of Ceridian) useful summary here [link to http://www.ceridian.co.uk/hr/newsletter/nav/1,4813,1085,00.html]
Roger Breeden, principal at Mercer observed: ‘The rules have changed again and keep on changing. The threshold has been brought down so the numbers affected are increasing. This makes long-term decisions and personal financial planning much more complicated for employees and employers. People may be driven away from retirement planning by the increasing complexity and distrust of the system, and making a change to the anti-forestalling regime so far into the tax year is particularly disruptive.’
The full Pre-Budget Report can be viewed here: [link to: http://www.hm-treasury.gov.uk/prebud_pbr09_index.htm