Budget clarification

Further points of clarification have been provided by answers given to a set of 'frequently asked questions" published on the Revenue's website.

1. Employers should receive their Budget Packs between 13 and 31 May.
2. Although the personal tax allowance and NICs earnings threshold will be frozen for 2003/04 at their current level, the lower earnings level will increase from £;75 to £;77 and the upper earnings level is expected to rise from £;585 to £;595, but that latter increase is subject to the level of inflation at the coming September.
3. The new 1% charge on employees' earnings above the UEL will not have to be recorded separately. It will be included in each employee's total NICs in the same way as the employer's additional payment on earnings above the UEL is recorded.

Other subjects covered by the questions and answers include the new tax credits (see the extended news item here), implementation of the Carter Review recommendations, subsidised buses, fuel scale charges, and the construction industry scheme.
Payroll Briefing 224 - 23 May 2002

The Budget for Payrollers

The delayed 2002 Budget Statement was presented by the Chancellor, Gordon Brown, to Parliament on Wednesday, 17 April. There was little to cause any immediate concern, but a number of measures will have significant impact on payroll compliance from April 2003 and beyond. Ian Congreave considers the implications of the announcements for payroll departments, including the dramatic increases in tax and NICs that will be caused by the freezing of the personal allowance and earnings threshold from 2003/04.

All of the Budget press releases and supporting documents are available on the Inland Revenue's website, at www.inlandrevenue.gov.uk . Most of the new Revenue documentation required to implement this year's changes were not to hand at the time of writing, other than the P7X instructions for tax code changes from week 11 and month 3. The Budget Pack, when it arrives, will contain new Tax Tables SR + B to D, revised E series booklets and the P7X instructions.

References to indexation relate to statutory provisions to increase allowances and thresholds in line with the Retail Prices Index that, at September 2001, showed a year-on-year increase of 1.7%. 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, which was published on 24 April. Readers should understand that any of the figures and proposals given below may change prior to implementation.

A number of rates and thresholds required statutory announcements before the Budget and these were explained in Issue 221 of Payroll Briefing. The Chancellor could still have adjusted some of them further but, in the event, the details set out in the statutory orders were confirmed without change. The measures are included, as appropriate, in this Budget review.

Income tax thresholds and allowances

As expected, there are no changes to the tax rates. Both of the rate thresholds are increased by the rate of inflation, as follows:

Most of the tax allowances were announced in the Pre-Budget Report last November. The blind person's allowance is now confirmed as increasing in line with inflation from £;1,450 to £;1,480.

The other tax allowance, the Children's Tax Credit, is increased from £;5,200 to £;5,290, providing £;10.17 per week in the wage packet. The new "baby tax credit" is worth an additional £;10 per week where a baby is born into the family during the 2002/03 tax year.

The allowances for 2002/03 are as follows:

Tax relief for the married couple's allowance and the Children's Tax Credit is given at 10%.

All tax codes with suffices L, H and A were lifted in bulk by 8 points from 6 April 2002. The increase in the Children's Tax Credit will require a further bulk rise in H codes by 4 points (e.g. 698H becomes 702H), and in A codes by 2 points (e.g. 580A becomes 582A), from the first payday after 17 June 2002, i.e. week 11 or month 3. The procedures for the increases are set out on form P7X that is included in the Budget Pack.

Further changes for 2003/04

The first of the Chancellor's tax raising measures that will affect payroll compliance is the freezing of the personal allowance during 2003/04. It will remain at £;4,615, and the emergency tax code will continue to be 461L. The age-related personal allowances, however, will increase more than the annual inflation rate at next September, by 8.4% to £;6,610 for people aged 65-74, and by £;240 over the inflation rate for people aged 75 and over. As announced last year, the age-related allowances will be indexed to earnings rather than to prices for the remainder of this Parliament.

The impact of freezing the personal allowance from April 2003 is not adequately demonstrated in the supporting Budget documents. Projections were given only for examples where an employee's earnings are the same in this and the next tax year. However, the real effect of keeping the personal allowance at £;4,615 for a further year can only be understood if it is assumed that the employee's earnings increase year-on-year.

For example, it might be expected that an employee earning £;400 per week now will be earning £;416 per week in a year's time, based on the latest average earnings index. The tax on £;400 this year, using tax code 416L, is £;64.08. Next year, the tax on £;416, using the same tax code and assuming that the two tax thresholds have increased by 2.5% to £;1,970 and £;30,600, will be £;67.38, a year-on-year increase of just over 5%. Applying the same assumptions to other earnings levels shows that the percentage increases for lower-paid employees will be much higher. For example, the tax paid by an employee earning £;100 per week this year and £;104 per week next year will increase by 36% year-on-year.

The proposed increases in NICs rates from April 2003 and the freezing of the earnings threshold for NICs have an even more marked effect, as is explained below.

National Insurance rates and thresholds

This is not usually a subject for the Budget as changes in NICs rates and thresholds are always announced at the time of the Pre-Budget Report in November and take effect from the start of the tax year. However, the second of the Chancellor's tax raising measures involves increasing all NIC rates by one percentage point from April 2003 and, to correspond with the freezing of the personal allowance for income tax, keeping the earnings threshold at the 2002/03 level for an additional year.

In more detail, the proposed changes are as follows:

• The rate of standard employer Class 1 NICs will increase from 11.8% to 12.8% and employee NICs from 10% to 11%.
• It is expected that the employer and employee rebates in contracted-out employment will not change, so the employer rates between the earnings threshold and the upper earnings limit will rise from 8.3% to 9.3% for COSR pension schemes, and from 10.8% to 11.8% for COMP pension schemes. The contracted-out employee rate will rise from 8.4% to 9.4%.
• The rate of Class 1A and 1B NICs for 2003/04 will also increase to 12.8%.
• In a departure from the existing contributions structure, employees will start to pay NICs on their earnings above the upper earnings limit at a rate of 1%. This idea has been under consideration for some time and is probably the "thin end of the wedge".
• To match the tax proposal, the earnings threshold will be frozen at £;89 per week or £;385 per month. There was no suggestion that the lower and upper earnings limits will also be fixed, so the lower earnings limit should be expected to increase in line with the state pension and the upper earnings limit in line with price inflation.

The combined effect of these changes is startling, although this was not apparent from the Government's own projections. As with the tax examples, they did not demonstrate the year-on-year rises in employees' earnings. Using the same employee earning £;400 per week this year and £;416 per week next year, and assuming a 4% rise in the lower earnings limit to £;78 per week and a 2.5% increase in the upper earnings limit to £;600,

• the employee's (not contracted-out) Class 1 NICs will increase by 15.7%, from £;31.10 this year to £;35.97 next year, and
• the employer's (not contracted-out) Class 1 NICs will increase by 14.1% , from £;36.70 this year to £;41.86 next year.

The corresponding increases in COSR employment are 17.7% and 17.8% respectively.

As with the tax projections, the increases are considerably higher in percentage terms for lower-paid employees. When earnings reach and exceed the upper earnings limit, the percentages increase as a result of the new 1% charge. For example, at £;850 per week, the employee contribution is over 19% higher year-on-year.

NI rebate

From April 2003, the employer and employee rebates that are paid in contracted-out employment will no longer be recorded separately. The NI Tables will be revised to show only the net amount of NICs paid by the employer and employee. The rebate boxes on form P14 for 2003/04 will be removed and there will be a new entry of "M" that will be needed in circumstances where the employee's earnings have been between the lower earnings limit and the earnings threshold, with the result that the total of the employer's NICs for the year is a negative amount.

Pensions earnings cap

The Earnings Cap for pension schemes is raised in line with inflation from £;95,400 to £;97,200. It sets an absolute ceiling on the contributions payable to and on the benefits payable by tax-approved pension schemes.

Car fuel scale charges

For five years in a row, the Chancellor has used a set formula for increasing fuel scale charges for the provision of fuel for private use, namely 20% above increases in pump prices. As the price of fuel has fallen since March 2001, the net increase in the fuel scale charges for 2002/03 is 16%. The old and new rates are as follows:

In the case of cars without a recognised cylinder capacity, the scale charge is £;4,200.

Over the five-year period, the scale charges for cars in the middle band have increased by 182% for petrol cars (from £;1,010 in 1997/98) and by 285% for diesel cars (from £;740 in 1997/98).

From April 2003, fuel scale charges will be linked to CO2 emission levels. Of the three options that were put out for consultation (see Issue 215 of Payroll Briefing), the method chosen involves the use of the percentage that is used to calculate the car benefit charge, applied against a set figure. This approach was selected because it is administratively simpler - it uses the figure already used for the car charge - and it allows the premiums and discounts for other types of fuel to be applied.

For example, a car with an emission level rating of 200 g/km will have a tax charge of 24% of list price during 2003/04. The same percentage will be applied against a value of £;14,400 for 2003/04, giving a scale charge of £;3,456 (i.e. 24% of £;14,400). The maximum scale charge, using this procedure, will be £;5,040 (i.e. 35% of £;14,400), a considerable increase on the maximum £;4,200 charge that applies for 2002/03.

A further change to the rules for the fuel scale charge is that, from April 2003, employees will be able to opt out of free fuel benefit at any time during the tax year and enjoy a proportional reduction in the fuel scale charge. Currently, if an employee has a company car for the entire tax year, the full fuel scale charge applies irrespective of the amount of free fuel for private use provided by the employer. It is an "all or nothing" charge. The effect of this rule is that, currently, the only effective time for an employee to give up the free fuel benefit is from the start of a new tax year.

Starting with the 2003/04 tax year, employees will be able to arrange with their employer to stop receiving free fuel part way through the year and the fuel scale charge will be calculated pro-rata to the number of days the benefit was available. However, to prevent any abuse of the concession, the reduction will not be permitted if the employee opts back into the benefit at any time in the same tax year.

Vans for private use

The tax charge for company vans that are made available to employees for private use is a scale charge, currently £;500 where the van is used by one employee, or £;350 for a van that is at least four years old. The Chancellor has announced a review of this method of determining the tax benefit for vans, with the purpose of introducing a new system that is linked to CO2 emissions and that reflects the current ways in which vans are used. The review will consider

• the definitions of cars and vans, particularly in areas where the distinction is not clear,
• ways to relate the private benefit to different types of vans, and
• bring the tax charge into line with other environmental taxes.

Subsidised public bus services

One of the Government's "green" measures, aimed at encouraging employees to leave their cars at home, allows employers to subsidise local bus companies to ensure that they provide services that are of use to their employees. Until now, employees only enjoy tax relief on this benefit if they do not pay less than the fares charged for other passengers. The Chancellor has announced that, effective April 2002, such subsidies will also not create a tax or NICs charge where employees travel free or at reduced fares.

The Carter Review

This review of payroll services was conducted by Patrick Carter over a three-month period in 2001 and was published by the Government at the time of the Pre-Budget Report last November. A summary of the findings and recommendations of the Review appeared in Issue 216 of Payroll Briefing. The Review proposed, among other recommendations, that employers could be helped with payroll compliance by making use of technology advancements for filing their end-of-year statutory returns.

The Government announced, as part of the Budget, that the key technology recommendations will be implemented along the lines proposed, but over a longer period of time. To encourage small employers to file their returns by either "Filing by Internet" (FBI) or by Electronic Data Interchange (EDI), cash incentives will be provided over a five-year period, commencing with the 2004/05 tax year. The incentives will be £;250 in each of the first two years, reducing to £;150, then £;100, and finally to £;75 in the three following years. The Government is still considering the Carter Review's proposal that "intermediaries", such as firms of accountants or payroll bureaux, will receive the incentives instead of the employers if they file the year-end returns electronically on behalf of the employers.

The recommendation that will have the greatest impact on the payroll operation of employers of all sizes is that electronic filing of year-end returns - initially P14s and P35s - should be compulsory. The proposed deadlines for employers and pension payers to transact electronically by FBI or EDI - but not by magnetic media - are

• from the 2004/05 tax year for the 7,000 or so employers with 250 or more employees,
• from the 2005/06 tax year for the 25,000 or so employers with between 50 and 250 employees,
• from the 2009/10 tax year for the more than a million employers with fewer than 50 employees.

However, small employers will be able to start filing their returns much earlier than 2009/10 and, if they do, they will receive the cash incentives depending on the year in which they file electronically for the first time.

The Revenue also intends to work closely with payroll software developers in order to build more validation checks into their systems so that more data passes Revenue checks the first time. The £;1000 annual charge for participation in the payroll software accreditation scheme is to be scrapped, as recommended in the Carter Review.

Employers in the Construction Industry Scheme

At the beginning of the 2001/02 tax year, the Revenue introduced an extra-statutory concession (ESC C32) to remove a double taxation charge on employers who fall within the IR35 legislation that are both limited companies and subcontractors holding CIS4 Registration Cards in the Construction Industry Scheme (CIS). The concession provided a temporary solution where such companies suffered an 18% deduction of tax on account of their corporation tax liabilities and were also required to pay income tax at the year-end on the same earnings.

The Chancellor announced that statutory measures would be introduced into the Finance Bill, partly to rectify this problem, but also to help all limited companies that were obliged to pay tax on account. The current rate at which tax on account is deducted is 18%, a rate that broadly matches the average tax and Class 4 NICs liability of individuals and partners who hold Registration Cards. However, in the case of limited companies with Registration Cards, their tax on account may currently only be offset against their corporation tax liabilities. Because many such companies are small and pay little in the way of corporation tax, the 18% deduction is excessive and means that they have to reclaim the overpaid tax at the year-end. The deductions also have affect their cash flow.

To remove this problem altogether, the new legislation will no longer allow the tax on account to be offset against corporation tax. Rather, it will only be able to be offset against the monthly or quarterly payments that the company must make to the Collector of Taxes. In the construction industry, these payments are not just in respect of PAYE tax, Class 1 NICs and student loan deductions, but also include the 18% tax on account that they deduct from payments made to other subcontractors who do work for them. If the tax on account that the company has paid in the month or quarter is more than the payments due to the Collector, the excess may be offset against payments made later in the same tax year. After the end of the tax year, the Revenue will refund any remaining excess.

Although they may not be affected directly, all employers will see two new boxes added to the reconciliation section of the P35 year-end Return for 2002/03. The 26 boxes, labelled A to Z on the 2001/02 Return, are unchanged, except that they are relabelled 1 to 26. Two new boxes are added, with instructions that they are only to be completed by limited companies holding CIS4 Registration Cards. The total CIS deductions suffered during the year, as shown on the new CIS132 Record form, is entered in the first box, and the amount, if any, which must be refunded, is shown in the second box.

Some 20,000 companies are expected to benefit from this change, including many that are also subject to the IR35 rules.

Tax Credits

The Chancellor announced that, in addition to the cost-of-living increases to tax credit rates from April 2002, the basic WFTC and DPTC credits will be increased by £;2.50 per week from June 2002.

Details have also been published of how the transition from the existing WFTC and DPTC to the new Working Tax Credit (WTC) will be handled. All WFTC and DPTC awards will end by 7 April 2003. The last awards that employers will pay for the full 26 weeks will be those running from 20 August 2002 to Monday, 17 February 2003. Awards that are paid up during that period and that are renewed will be paid entirely by the Revenue direct to the recipient. As a result all employer payments of the existing tax credits will end by the middle of February 2003. The first payments by employers of WTC will start on 18 May 2003, at the end of the 42-day notice period starting on 6 April 2003.

National Minimum Wage

When recommending the levels of the National Minimum Wage from October 2001, the Low Pay Commission recommended that there should be a further increase from October 2002. The Government confirmed, as part of the Budget, that the October 2002 increases will go ahead. The adult rate, from age 22, will increase from £;4.10 to £;4.20 per hour, and the development rate, paid to juniors aged 18 to 21 and to adults receiving accredited training in the first six months of a new job, will increase from £;3.50 to £;3.60 per hour.
Payroll Briefing 223 - 8 May 2002

2002 Budget Summary

Children's Tax Credit

As already announced, the annual rate of Children's Tax Credit increases to £;5,290 and the new baby Credit is introduced at £;10,490. The weekly equivalents are £;10.17 and £;20.17, respectively.

Construction Industry

Subcontractors that have Registration Cards and that are limited companies will be able to offset their 18% tax on account against their payments to the Collector. The current provision that only allows it to be offset against corporation tax is being removed.

Fuel Scale Charges

Fuel scale charges have already been announced for 2002/03. From April 2003 they also will be linked to carbon dioxide emission levels. The method that has been chosen will involve multiplying the car benefit percentage, i.e. something between 15% and 35%, by an annual set figure.

Also from April 2003, employees will be able to opt out of the free fuel benefit and the fuel scale charge will be reduced accordingly.

Income tax

Tax rates stay the same and the tax thresholds are confirmed, as already announced, at £;1,920 and £;29,900.

The current £;4615 personal allowance will not be increased for 2003/04, but age-related allowances will increase by more than the level of inflation.

National Insurance

NIC rates for employees and employers will increase by 1% from April 2003, giving standard rates of 11% and 12.8% respectively. Employees will also pay 1% on their earnings above the UEL.

The earnings threshold, currently £;89 per week, will not be increased for 2003/04.

National Minimum Wage

The October 2002 hourly rates are confirmed as £;4.20 for adults and £;3.60 for juniors.

Payroll Services

The key technology-related recommendations of the Carter Review are to be implemented, but over an extended time period. Electronic exchange of documents with the Revenue will be compulsory by

• 2004/05 for employers with 250 or more employees
• 2005/06 for employers with between 50 and 250 employees
• 2009/10 for employers with fewer than 50 employees

Annual incentives will be available for small employers, starting at £;250 and tapering to £;75 from 2004 onwards.

Subsidised buses

At present, where employers subsidise local bus services, the benefit is not taxable if the employees pay full public fares. From April 2002, the tax exemption will also apply if employees travel free or at reduced fares.

Tax Credits

The basic credit will increase by a further £;2.50 in June 2002.

Full details will appear in Payroll Briefing 223

Budget changes - in advance!

Other increases to rates have also been announced in advance of the Budget as tax law requires them to be published before the start of the new tax year. In the specific cases described below, the existing rates must be increased in line with inflation, i.e. 1.7%, the annual rise as at September 2001, unless overridden by provisions in the Finance Bill. Accordingly, the necessary Orders have been laid, but all of the figures announced could still be changed by the Chancellor in the Budget.

Tax bands

The tax bands, assuming statutory indexation applies, will be as follows:

The Chancellor could change the bands further and, of course, he could decide to change the tax rates themselves.

Tax thresholds

All of the tax thresholds were announced by the Chancellor last November, with the exception of the blind person's allowance. This is being increased in line with inflation from £;1450 to £;1480.

Children's tax credit

This tax allowance, currently set at £;5,200 and providing an additional £;10 per week in the recipient's wage, is being increased to £;5,290, equivalent to £;10.17 per week.

Note, however, that the inflation increase will not apply to the additional £;10 per week that will be paid, from 6 April 2002, where a baby is born into the family during the 2002/03 tax year.

Pensions Cap

The earnings cap for pension schemes is raised from £;95,400 to £;97,200. This sets an absolute ceiling on the contributions payable to and on the benefits payable by tax-approved pension schemes, including stakeholder pension schemes.
Payroll Briefing 221 - 12 April 2002

Budget date 2002

The Chancellor has announced that the Budget will be on Wednesday, 17 April. Any changes to tax codes and tax tables will take affect from the first payday after 17 June 2002, backdated to 6 April. The implications of a late Budget are that

• any bulk increases to tax codes as a result of Budget announcements will be applied,
• any P6 coding notices will also be applied, and
• the new taxable pay tables for 2002/03 will come into use on the first payday on or after 18 June.

The tax codes on any P45s received in the new tax year that are dated in 2001/02 may be applied, after adjusting for any bulk increases, until 24 June 2002, instead of the usual 24 May.
Payroll Briefing 218 - 14 February 2002