GUEST OPINION: Taxation – what April’s changes will mean for your employees

The fiscal landscape has changed dramatically since the coalition Government came to power last spring

Although a raft of tax changes were announced in last year’s Emergency Budget, the focus has been on measures such as the rise in student tuition fees and the dramatic cuts

to local government and defence spending. But as we approach the end of the tax year, the attention has turned to the income tax and National Insurance Contribution (NIC) changes that come into force on 6 April 2011.

The proposed £1400 reduction to the higher rate (40%) income tax threshold from £43,875 to £42,475 and how this will affect many company car drivers has recently made the headlines. The emphasis has been on how the lowering of the threshold will increase the income tax to be paid (as well as knock-on effects such as the potential loss of child benefit for those who will become higher rate taxpayers as a result). To date, though, there has been little if any consideration of the impact on net pay after taking account of the proposed changes to NIC as well as those to income tax (see Table 1).

Net pay

Table 2 shows how the changes will affect the net pay of an employee who receives a new Lexus CT200h hybrid company car in addition to salary. As a petrol hybrid with CO2 emissions of just 94g/km, the benefit-in-kind charge is £2343, or 10% of the entry model’s £23,430 list price.

Given the personal allowance – the amount an individual can earn before being taxed on income – increases by £1000 to £7475, a basic rate (20%) taxpayer would pay less in income tax next year compared with this year. Even though the primary threshold before NIC kicks in will also rise, the tax and NIC savings are partially offset by a 1% increase in the rate of NIC, so as salary rises the driver’s net savings falls.

As the employee’s earnings rise and he becomes a higher rate taxpayer, his income tax charge also rises. However, as the salary increases through the tipping point for NIC (that is, the upper earnings limit) there is a reduction in the rate of increase in NIC (arising from the interaction of the changes to both the NIC thresholds and the different rates of NIC), but, thereafter, NIC increases again in line with the salary.

For a car such as the BMW 520d SE Auto (see Table 3) with CO2 emissions of 137g/km, the tax position is slightly different because the benefit-in-kind band itself will increase in 2011/12; the percentage on this car will rise from 19% to 20%, thereby increasing the car’s benefit charge from £5892 to £6202. For a higher rate taxpayer, this change in itself will increase the income tax on the BIK by £124 before any effect of the reduced higher rate tax threshold is taken into account. The reduced threshold will add a further £80 to the income tax bill, giving a total tax rise of £204, on top of which the employee’s salary will be subject to higher NICs (as noted above for the Lexus driver).

In summary, as shown by both examples, as an employee becomes a higher rate taxpayer, his total income tax and NIC will rise and he will be worse off compared with this year. So, what action can employees take to reduce the impact of these impending tax and NIC rises?

. It’s crucial that drivers truly understand how the company car benefit is calculated given the benefit value is directly related to the CO2 emissions. For example, a high-specification, low-emission car may have a better tax cost than a poor specification car with higher emissions.

. With an increasing number of cars, such as the Lexus CT200h and Volvo Driv-e range which emit less than 100g/km, drivers should choose cars with the lowest possible emissions that still meet their work/life needs, especially because the car benefit charge for cars emitting more than 100g/km will increase from April 2012, thereby making some popular models much less tax-effective.

. Company car drivers who receive free fuel for private use should consider whether they actually receive any net benefit. Those undertaking less than break-even private mileage could actually reduce their taxable earnings but increase their disposable income after fuel costs, although negotiation with the employer will be needed.

. Finally, drivers should be encouraged to consider their salary and benefit package as a whole. For example, some other popular benefits can be provided via salary-sacrifice arrangements, thereby reducing taxable income without incurring any further benefit-in-kind.

Jeff Whitcombe of Wessex Professional Services advises on a range of employee reward and employment tax issues. www.wessexprofessionalservices.co.uk