In the 2006 budget, the chancellor announced an intent to harmonise Income Tax and National
Insurance bands, the very laudable thinking behind this is summarised succinctly in a HM Treasury
paper written in ‘07;
“It is argued that alignment would reduce administrative burdens,
provide considerable simplification and potentially improve outcomes for the low paid.”
Consequently, over the past two years the Upper Earnings Limit (UEL) on which employees
pay the full rate of NI (11%) has been rising rapidly towards where the upper band for Income
Tax starts. The UEL post April 09 moves to £43,888. This gets close, although oddly doesn’t
match, the point at which Higher Rate Tax is paid; this (assuming a full personal allowance)
is going to be £43,875 for 09/10. Is it just me or if you were looking to harmonise things
for simplicity wouldn’t it have made sense to either pay tax on £13 less or NI on £13 more!?!
Implications;
Many employees are now paying more in NI than they were two years ago, in the worst cases
the increase in NI is almost £1,000 per annum!!!
Paying more NI is OK though isn’t it? After all, the Upper Earnings Limit (UEL) for NI has
always been the cap for the earnings related part of the Second State Pension (S2p) so surely
raising the NI cap will just mean a larger S2p? Well, much like the 1% rate of NI paid on all
earnings above the UEL, sadly no – it buys nothing extra for the employee. The Pensions Act ’07
proposes that S2p will no longer be earnings related; instead it will become a flat ‘additional pension’
in the future. To achieve this we evidently need a new TLA (Three Letter Abbreviation); the ‘UAP’,
standing for ‘Upper Accruals Point’. The UAP is the cap for S2p and has been fixed for the
foreseeable future at the ‘08/’09 UEL of £40,040.
When you look at the above I have my doubts that the government’s definition of ‘simplification’
is drawn from the same dictionary as mine!!!
What can be done to avoid this massive increase?
At a time when many employers may be freezing or cutting pay and perhaps laying off staff
further reductions in employee net pay are unlikely to be welcome. Salary Exchanging for pension
contributions might provide an answer.
Salary Exchange has always been attractive. However, for those earning in excess of the UAP it
is now more effective than ever before. Below is an example of an employee earning £43,000 per
annum and making a 6% pension contribution matched by their employer.
In the example the employee’s net take-home pay has reduced over the last two tax years by a total of £180.
However, by using Smart Exchange, the total gross pension contribution has risen over the 2 years by £794 per annum!
Looking at it another way, for the employer not currently operating Salary Exchange,
bringing in this option would offer the employee in this example the equivalent of a 1.85%
increase in the value of their remuneration at no additional cost to the employer! In these
tough times this is the veritable rabbit out of a hat!
How Can Lighthouse Group Employee Benefits Division help you with Salary Exchange?
Lighthouse Group Employee Benefits Division offer employers a very powerful, “Smart Exchange”,
on-line employee guidance tool. This tool enables employees to go through the decision making
process of whether or not to exchange salary for pension contributions, giving them all the
information in a clear and personalised manner, and enabling them to make an informed decision
about whether they want to opt for Salary Exchange. It does all this without the need for intervention
or communication from either the financial advisor or the employer and it provides a full audit
trail for all parties. Additionally, we are also able to run off payroll reports for the employer
both at outset and each time the employee alters their Salary Exchange. Please call Roger Sanders
on 0161 819 3400 or use our on-line enquiry form to
obtain further details on how we can use this powerful option to enhance the benefits you provide your employees.