Budget Update for Employers – March 2011
This week’s budget didn’t have the usual fanfare – these days most of the main announcements for the forthcoming tax year seem to be announced many months ahead of time, but there is always something that is unexpected, and George Osborne and his coalition team are still a relatively unknown quantity.
There were some interesting developments that should spark the interest of employers, and this is why you’re receiving this special one off update from us.
Corporation Tax
In an effort to stimulate business and the economy, main corporation tax rates will be reduced for the financial year commencing 1st April 2011 as follows:
The smaller companies rate will reduce from 21% to 20% for the financial year commencing 1st April 2011.
Marginal rate relief planning will continue to be key for many, and will likely see emphasis on traditional planning such as salary / pensions to avoid the marginal 27.5% taxation rate.
National Insurance increases
The planned 1% increase on both employee and employer rates of National Insurance effectively mean a 2% rise in the taxation of salaries for an average employee.
So, for each £1.00 you pay a basic rate tax payer, it now costs you the employer 113.8 pence and they receive in their hands 68 pence (100p – 20p Income Tax – 12p National Insurance).
This makes Salary Sacrifice (sometimes called Salary Exchange or SMART Salary) arrangements more attractive than they’ve ever been. These arrangements can be structured so that you can share the savings in national insurance with your employees, making it a win win for many.
By way of example, for a company with 100 employees, typical salary £25,000, with 5% average employee gross pension contribution, successfully introducing SMART Salary could save over £17,000 employer National Insurance contributions – and these savings could be shared between you and your employees (their savings in employee National Insurance can be used to increase take home pay or boost pension contributions).
For more information, please contact us for our free guide to SMART Salaries for Employers.
Tax Simplification
The UK now has officially the most complex taxation system in the world (recently overtaking India).
You may have seen the announcement that 43 tax reliefs are to be abolished and consultation is to start on the merging of income tax and national insurance. The view is that removing the complexity of two different taxes on earned income will generate efficiency savings and remove so-called red tape for employers.
Simplification of taxation is to be welcomed of course, but as usual there are issues that can arise from this. For instance, with this simple statement those not at work (e.g. pensioners) might suddenly find they are paying higher taxes on their retirement income but the Chancellor specifically said this was not an aim of the simplification. This means that simplification is likely to come with exceptions, which in turn can introduce complexity. This difficulty is acknowledged however, and it seems unlikely that these changes would be fully implemented during the current parliament which runs to May 2015.
Observers have pointed out that this could have an impact on Salary Sacrifice arrangements in future, although the lengthy timescales involved mean that employers should not be put off from embarking on these arrangements today.
State Pensions and Contracting Out
The government intends to move to a flat rate £140 per week (in today’s terms) state pension system in place of the current Basic State Pension and State Second Pension.
This would also entail the abolition of contracting out for defined benefits schemes (defined contribution contracting out has already been banned from 2012). This would mean increases to national insurance for people in these schemes (employer and employee) and must surely also be another contributor to the demise of these schemes (see separate article below).
A Green Paper with the government’s proposals will be issued in due course.
Final Salary Pensions
The recent Hutton Report covered recommendations for the future of public sector pensions, and made recommendations that would see average employees pay more, for longer, and possibly retire with less. The Chancellor announced that the government accepts the proposals from the Hutton Review, which will form the basis for conversations with unions and employee representatives later this year.
We find it difficult to understand why the government (or the review) did not go further, as it seems unfair that most private sector employers had to give up on final salary schemes years ago. It seems likely that this is storing up a bigger problem for the future.
We specialise in helping employers deal with final salary scheme liabilities, and have many client testimonials that show significant cost savings that can be made by tackling these issues sooner rather than later. Please get in touch if you would like to discuss this.
High Earners
Apparently the 50% tax rate band for those earning over £150,000 is not intended to be a permanent feature, but there is of course no commitment to as and when that rate might be reduced. In the meantime though, individuals paying that rate of income tax do have options for reducing it via tax efficient investment arrangements. Some of these arrangements get better from 6th April 2011 – get in touch if you have employees / directors who could benefit.
Also, just a reminder that any employees earning over £100,000 also have a reduction in their personal allowance which means an effective 60% rate of tax between £100,000 and £114,950. Again planning schemes are available that can help recover this 60% tax.
Disguised Remuneration
The government had already announced that it would be making changes that would tax disguised remuneration from Employee Benefit Trusts, Employer-Financed Retirement Benefit Schemes and other employer “third parties” to employees.
These arrangements had been growing in popularity and there was a risk that this would increase even more as a result of the large reduction in the annual allowance for pension funding. However, new pension rules including a form of carry forward may assist from 6th April 2011, and we can help you make the most of this for your key employees and directors, where relevant.
Outlook for the Economy
The growth in GDP figures for the current year have been adjusted downwards to a modest 1.7% (rising to 2.5% in 2012).
CPI, the government’s favoured measure of inflation, reached 4.4% this week (year from March 2010 to February 2011) and some say it could peak at higher levels over the next few months. Against this backdrop, many employers have introduced measures such as frozen wages to maintain employment levels in the post-recession period.
If you find that you’re not in a position to offer pay rises this year, but have a healthy benefit package for your employees, we have a service that can help with your employee relations. This is proven to improve staff retention without necessarily increasing spend on employees. This is a unique service for SME employers, and has not previously been available for companies of that size.
This, combined with SMART Salaries mentioned earlier, could mean that you are able to increase take home pay for employees at no cost to your business.
Not in the Budget, but…
You may have heard that Compulsory Workplace Pensions are to be introduced to the UK from next year. It would be remiss of us not to mention this, although strictly speaking we haven’t seen anything mentioned in the Budget about it. The upshot of this is that all employers, irrespective of size, will have to pay into a qualifying workplace pension arrangement. This is big news, and for a limited time we are happy to provide a free review of your current arrangements in the light of this legislation.
We hope you found the content in this special budget update useful for your business. Please feel free to pass a copy of this to a colleague. We are happy to include you in future updates and promise not to bombard you with emails, and to keep everything relevant and focussed to your business. We never pass your contact details to third parties without your permission.
Content of the articles featured in this publication is for your general information and use only and is not intended to address your particular requirements. They should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.
