Experts Question UK NIC 'Rollback'

by Robert Lee, Tax-News.com, London

31 May 2010

Reports suggesting that the 1% rise in employer's national insurance contributions (NICs) will be abolished are not entirely accurate because the new government is merely planning to raise the threshold at which the rate increase kicks in.

Pinsent Masons said in a note sent out to its clients that while employers will pay less NICs in respect of low paid employees, there will still be an increase in NICs for employers of higher paid employees.

"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%," explained Catherine Robins, Tax Partner at Pinsent Masons.

Robins added: "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 GBP21 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 GBP20,000, but less NICs in respect of anyone earning less than this."

For an employer employing someone earning GBP50,000 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 GBP443 in the employer's NICs. The government's threshold increase will mean that the increase in employer's NICs is reduced by about GBP150. However this still means an increase in the employer's NIC bill of nearly GBP300. The higher the salary the greater the increase will be, so for an employee earning GBP150,000 the employer's NIC bill will increase by nearly GBP1,300.

By contrast an employer of an employee earning GBP15,000 will pay about GBP57 less NICs than at present, but under the Labour proposals would have paid GBP93 more.

Robins also noted that the rise in NIC rates will have an impact on 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."

Many companies have been looking at implementing share plans which deliver reward in a capital form in the light of these proposed changes, as well as changes to income tax that have already taken place. However, the firm advises its clients to await further detail of the coalition government's proposals to increase capital gains tax to assess what impact there may be on share plans going forward.

Recommended