The Budget for Payrollers

The 2001 Budget Statement was presented by the Chancellor, Gordon Brown, to Parliament on Wednesday, 7 March. There were few surprises, especially as a number of the changes confirmed provisions that were put forward in the Chancellor's Pre-Budget Statement in November 2000. Ian Congreave considers the implications of the announcements for payroll departments.

All of the Budget press releases and supporting documents are available on the Inland Revenue's website, at www.inlandrevenue.gov.uk. Unlike last year, the revised CWG1 Help Cards, P7X instructions for implementing the tax changes from week 7 and month 2 and the new Tables SR + B to D were not made immediately available.

References to indexation relate to statutory provisions to increase allowances and thresholds in line with the Retail Prices Index which, at September 2000, showed a year-on-year increase of 3.3%. There are, in addition, statutory rounding rules.

NOTE: Most of the changes proposed by the Chancellor are subject to parliamentary approval of the Finance Bill. Readers should understand that any of the figures and proposals given below may change prior to implementation.

Income tax thresholds and allowances

There are no changes to the tax rates. The higher rate threshold is increased by the rate of inflation. However, the band at which the lower 10% tax rate is paid is widened by an additional 20 percentage points, a change that will increase the number of employees only paying tax at 10% to nearly three million. The bands are as follows:

The increase in the personal allowance, from £;4,385 to £;4,535, was announced last November and L-suffix tax codes are increasing by 15 points from 6 April. The new tax allowance from April 2001 is the Children's Tax Credit. As hinted in the November Statement, the Chancellor increased the index figure from £;4,420 to £;5,200 (see below). The married couple's allowance and blind person's allowance are increased at the rate of inflation. Note that some employees under age 65 may still be receiving the married couple's allowance if their partners reached age 65 before 6 April 2000. Tax relief for the married couple's allowance and the Children's Tax Credit is given at 10%. The allowances for 2001/02 are as follows:

Personal allowance

Married couple's allowance

Children's tax credit

Blind person's allowance

personal allowance

married couple's allowance

personal allowance

married couple's allowance

As announced in the Pre-Budget Report, personal allowances for those aged 65 or over will be increased by £;240 over indexation in 2003-04, to accompany the introduction of the Pension Credit in April 2003. The new levels will then be increased by reference to the rise in earnings rather than prices for the rest of the next Parliament.

Effecting the tax changes

New Taxable Pay Tables (Tables SR + B to D) dated May 2001 will be issued to all employers with the Budget Pack. This will bring the allowances and thresholds into effect from 18 May 2001. Replacement CWG1 Help Cards will also be included in the Budget Pack, where they have changed as a result of the Budget.

Tax codes with 'A' and 'H' suffices will be increased in bulk unless separate coding notices are received for the employees concerned. All 'A' suffix codes are to be increased by 18 points (e.g. 554A becomes 572A). All 'H' suffix codes are to be increased by 36 points (e.g. 654H becomes 690H). Changes to any tax codes with suffix 'T' and prefix 'K' will be made by coding notices. There are no further general increases to codes with suffices 'L', 'P', 'V' or 'Y'. Full instructions are given on form P7X, a copy of which is included in the Budget Pack.

Pensions Cap

The Earnings Cap for pension schemes is raised from £;91,800 to £;95,400, a 3.9% increase. It sets an absolute ceiling on the contributions payable to and on the benefits payable by tax-approved pension schemes. It will also apply to Stakeholder pension schemes from 6 April 2001.

Employee share ownership

Changes are made to the two quite different share schemes that were introduced during 2000.

Enterprise Management Incentives (EMIs) allow trading companies with gross assets of no more than £;15 million to grant share options of up to £;100,000 to each of 15 key employees. The maximum is, therefore, £;1.5 million per company. After consultation, the maximum is raised to £;3 million and the limit on the number of employees who may be given options is removed. However, the individual limit of £;100,000 remains. There is also no longer a requirement for them to be "key" employees. Under the rules for these schemes, the options are free of tax and NICs both on grant and on exercise. By the end of February 2001, 480 companies had awarded options to over 2,600 employees.

All-Employee Share Ownership Plans (AESOPs) allow employers give free shares to employees, or match company shares that they buy under the plan. If held for five years, any gain in value is free of income tax, NICs and capital gains tax. As the plans are operated through a trust, there can be a stamp duty charge when the trust buys the shares and also when the employees buy the shares. The three changes announced are that (1) the stamp duty charge when employees buy shares will be removed, (2) relief from any income tax charge will be given where the employer or trust meets the stamp duty charge when the trust buys the shares, and when they meet any incidental costs of operating the plan, and (3) an employee's length of service to qualify under the plan will include service in any of the companies for which the employee has worked within a group of companies. The first AESOPs went live in September 2000. Over 280 companies have sent in plans to the Revenue for approval and 187 are ready to be implemented.

Works buses

Since 1999, there has been no tax liability on commuting travel provided in a works bus, as long as the bus has at least 12 seats. The proposal in the November Statement, that the minimum seating requirement would be reduced to 9 seats, has been confirmed. The exemption will only apply to vehicles that were originally constructed to carry that number of seats, thereby preventing smaller vehicles, e.g. people carriers, being adapted to squeeze in extra seats.

Mileage rates

The Authorised Mileage Rates (AMRs) for smaller, private cars and vans used on company business are increasing from April 2001. The new rates are as follows:

The mileage rates for motorcycles and bicycles continue at 24p and 12p per mile respectively.

Several ideas that were suggested by the Chancellor in November have been confirmed. The existing AMRs for private vehicles used on company business will be replaced by single-tier statutory rates from April 2002. The new formula will remove any link with engine size and will permit payments to be made for cars and vans, without incurring a tax liability, of up to 40p per mile for the first 10,000 business miles in a tax year and up to 25p for miles above 10,000. The rate for motorcycles will continue at 24p but the bicycle rate will increase from 12p to 20p per mile.

There will also be no NICs liability on payments that do not exceed 40p per mile. However, the Revenue is still considering the NICs implications for payments made for business mileage that exceeds the 10,000-mile threshold.

The reporting requirements will be changed significantly. At present, all payments made to employees for the use of their own vehicles must be reported on form P11D, even if they are below the AMRs, unless the employer has a dispensation or reports the payments otherwise under the Car Allowance Enhanced Reporting Scheme (CAERS) or a Fixed Profit Car Scheme (FPCS). When the statutory rates are introduced, there will only be a P11D reporting requirement if the payments exceed the statutory rates, and then only in respect of the excess over the statutory rate. Dispensations that cover payments in respect of mileage allowances, or paragraphs to that effect in dispensations that cover a number of items, will lapse in April 2002. No further dispensations will be available. Where employers pay below the statutory rates, employees will still be able to claim tax relief on the difference. However, they will not be able to claim for relief based on actual receipted bills, nor for capital allowances or interest on car purchase loans. A new reporting scheme is planned for employers that have a CAERS or FPCS. The FPCS is likely to be discontinued, and the new scheme will be similar to the CAERS.

The idea of employers making additional payments to employees using their own cars for business when carrying passengers has also been confirmed, but at a higher rate that proposed last November. A payment of up to 5p per mile per passenger carried may be paid without any tax or NICs liability, from April 2002. Passengers must be fellow employees making the same business journey. However, it has now been specifically stated that, where employers do not make such additional payments, employees will not be able to claim tax relief when accompanied by their colleagues on business trips.

Cycling to work

The Revenue is preparing regulations that will allow employers to provide up to six breakfasts per year to encourage staff to cycle to work.

Fuel scale charges

The fourth of five annual consecutive increases in the fuel scale charges for company cars will see the rates go up by 14% from April 2001. The formula over the five years is a 20% increase over any movement in pump prices. As the fuel prices during 2000/01 have fallen, the increase is limited to 14% (as compared with a 41% increase from April 2000). The new rates are as follows:

Business gifts

The de minimis figure, below which there is no tax liability on business gifts, is increased from £;10 to £;50 from April 2001. Such business gifts will enjoy this tax relief (and corporation tax relief) if they

• bear a conspicuous advert for the donor's business,
• do not consist of food, drink, tobacco or tokens or vouchers exchangeable for goods, and
• do not cost the donor - together with the cost of other such gifts to the same person - more than £;50 in the same year.

Children's Tax Credit

The tax allowance to replace the married couple's allowance, the Children's Tax Credit, has gone into effect from April 2001 at the previously announced weekly level of £;8.50, i.e. based on the £;4,420 index figure, at 10% tax relief. As expected, the Chancellor increased the index to £;5200, equivalent to £;10 per week. This will require new coding notices for all recipients, but no details have yet been given as to when the adjustment will be made.

From April 2002, the allowance will be doubled to £;10,400, equivalent to £;20 per week, for families in the year of a child's birth.

Maternity and paternity pay

In December 2000, the Government published its Green Paper entitled Work & Parents - Competitiveness and Choice, setting out many proposals for reform of the existing maternity and family provisions. The consultation period for the proposals ended on 7 March, the day of the Budget but, even before the Budget, Tony Blair announced that the decision had already been taken to introduce paid paternity leave and Stephen Byers gave a clear hint in a speech at an Equal Opportunities Commission Seminar on the Green Paper that the pay and leave provisions would be extended to adoptive parents.

Confirmation of those trailed changes were given by the Chancellor, along with other decisions that had also been made in response to the feedback to the Green Paper. The details as revealed so far are listed below but there are many points yet to be clarified.

- The increase in the lower weekly rate of Statutory Maternity Pay and Maternity Allowance to £;62.20 from April 2001 has already been announced. The rate will be increased to £;75 per week from April 2002. From April 2003 it will be increased further to £;100 per week, with the higher rate for the first six weeks remaining at 90% of average earnings if that is lower than the flat rate.

- The period during which maternity pay will be paid will increase from 18 weeks to 26 weeks from April 2003. Presumably this will require a corresponding change in the employment law provisions for ordinary maternity leave, but nothing has yet been announced about that.

- Paid paternity leave will be introduced from April 2003, for two weeks at the time of the birth of a child, at the SMP flat rate, i.e. £;100 per week. This will presumably be known as Statutory Paternity Pay (SPP) and will be funded by the Government.

- Paid adoption leave will also be available from April 2003 to one of the adoptive parents at the time a child is first placed for adoption with a family. The announcements have indicated that it will be paid for the same 26-week period as SMP but no information has been given as to whether a higher rate will be paid for the first 6 weeks.

- The threshold below which Small Employer Relief is available for recovering payments of SMP is increased from £;20,000 to £;40,000 from April 2002. The threshold is the total amount of Class 1 NICs, both primary and secondary, due in the last complete tax year prior to the pregnant employee's qualifying week. As long as Class 1 NICs do not exceed the threshold, the employer may reclaim 100% of the SMP paid, plus a further 5% compensation for the employer's NICs paid on the SMP payments. It may be that this level of compensation may have to be reviewed when the lower SMP rate is increased to £;75 and £;100. The increase in the threshold will allow around 60% of all employers to recover their SMP payments in full, plus the compensation.

Tax Credits

The rates at which Working Families' Tax Credit (WFTC) and Disabled Person's Tax Credit are paid are increased from April 2001 by the rate of inflation. In June 2001, the basic credits will be increased by £;5 per week and the childcare credit thresholds will be increased, from £;100 to £;135 for one child, and from £;150 to £;200 for two or more children. These are to reflect general increases in the cost of childcare across the country. The increases will mean that, in April 2001, the minimum income guarantee for a family on WFTC with one child will be £;214 per week (based on one earner working 35 hours per week and receiving the National Minimum Wage). By October 2000, following the increase in the NMW (see News items), the guarantee will increase to £;225.

The component rates of WFTC and DPTC in 2001 are as follows:

Payroll Briefing 197 - 15 March 2001