New Labour philosophy has been at the heart of employee taxation policy since 1997. Victoria Furness evaluates the changes and outlines the key issues for the future

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"A week is a long time in politics," said former Labour prime minister Harold Wilson in 1965. Eight years must, therefore, feel like a lifetime for current Labour leader, Tony Blair. But although the political landscape has changed since 1997, when a buoyant Labour Party was returned to power after an 18-year hiatus, the taxation of employee benefits has, by contrast, produced relatively few surprises in the same period.

When the new government was elected on May 2, 1997, there was an air of expectancy - an unprecedented 120 women were voted into Parliament, Blair was the youngest prime minister of the 20th century, and a new political framework championing New Labour philosophy was put in place.

Such New Labour values have influenced the government's approach to employee benefits taxation over the past eight years through the promotion of work-life balance, the enterprise economy and environment-friendly policies to name a few.

While these policies have given tax advantages to new employee benefits - such as childcare vouchers, bicycle loans and share incentive plans - Chancellor Gordon Brown has also introduced several so-called backdoor stealth taxes.

In April 2002, the Chancellor announced a 1% increase in national insurance (NI) contributions for employers. This was a double whammy for firms, having been hit two years previously when the majority of employee benefits - not just company cars and fuel - were brought under NI legislation.

Perhaps in an attempt to buffer the hit, the government has introduced new tax-efficient benefits over the past eight years. In particular, family-friendly benefits have come to the fore with changes to the tax status of childcare vouchers since April.

While not a new initiative - employee benefits provider Accor Services has been developing childcare vouchers since 1989 - for the first time they are tax and NI-exempt up to the value of £2,600 per annum. "This is equivalent to savings for a standard rate taxpayer of £816 and £1,066 for a higher rate taxpayer," says Accor corporate business manager Anne Ross.

There are already signs that it will be a popular benefit. The 2005 CIPD Reward Management Survey found that childcare vouchers are the benefit most likely to be introduced by organisations this year, while Accor's own survey estimates 40% of companies will offer them by the end of the year.

However, childcare vouchers come with caveats. First, they can only be used at government-approved nurseries or with registered nannies and au pairs. Second, there are concerns that low earning employees will miss out on tax credits since families receiving childcare vouchers cannot then claim the childcare element of working tax credit on the same costs.

Others believe the £50 a week offering is insignificant compared to the overall cost of childcare. "The current restrictions on childcare are ludicrously low and the £50 threshold has to move," believes Martha How, senior law consultant at Hewitt. However, the government is unlikely to make any changes while the scheme is in its infancy. Labour put the environment at the heart of its policy-making in its 1997 manifesto. First on its agenda was reform of the company car tax regime in 2002 to tax CO2 emissions rather than the number of business miles travelled.

Opinions vary on the effect this has had on company cars. "The CO2 emission policy is consistent with the government's green policy but it has effectively killed off the company car," says How. Figures from the government would certainly reinforce this, with a drop of 250,000 in the number of company cars owned by employers in the first two years after the legislation was introduced.

Alison Haynes, partner at Deloitte, does not believe it has been that catastrophic. "To some extent, it has rejuvenated the perk car market," she says. "Under the old regime, the non-essential business driver would have been taxed most highly. Now employers can almost choose the level of tax depending on how fuel efficient the car is."

While encouraging employers to take cars off the roads, Labour has been trying to persuade employees to get on their bikes by offering tax exemptions on the loan of bicycles. As always, there are some restrictions - employees must use the bicycle mainly for home to work travel, for example, to qualify. But despite the government's green campaign, the benefit has not seen a big take-up, except in firms with environmentally friendly policies or companies that also offer shower facilities and a place to park their bike.

Another strategy central to New Labour is the creation of an enterprise economy and encouraging more employees to join share ownership plans and co-operatives. To achieve this goal, the government has granted tax breaks to plans such as the enterprise management incentive (EMI) scheme. Under the scheme, small companies can offer staff tax-advantaged share options up to a market value of £100,000.

Bruce Wilson, tax partner at Campbell Dallas thinks they are an effective benefit. "They help retain staff in a company," he says. "They are also very flexible so employers can negotiate separate options with different employees."

The share incentive plan (Sip) is another scheme that aims to make share ownership available to all employees. Introduced in the 2000 Finance Act, it enables employees to buy a certain amount of shares in their company each month. Employers can match shares or issue free shares as an employee benefit, and as long as the shares are held for five years, they are tax and NI-free.

However, ProShare, now part of the Institute of Financial Services (IFS), considers the five-year holding period prohibitive. "Moving it to three would mirror executive options," argues Fiona Downes, head of employee share ownership at IFS ProShare. "A lot of companies have a non-static workforce so it would enable them to obtain their shares earlier."

The government has made a lot of noise about its commitment to narrowing the 'digital divide' and in the 1999 Finance Act it introduced a £500 annual tax exemption from the taxable benefit on loaned computing equipment.

The Home Computing Initiative (HCI) was relaunched 12 months ago after limited success at first, and take-up has grown since, with BT Home Computing claiming a year-on-year increase of 100%. "One of the attractions of HCI is that it is a very tangible benefit," says Tony O'Neill, corporate programme director at BT Home Computing. "And an employee can save up to 41% depending on their tax rate."

To qualify for tax exemptions, employers have to loan the PC to the employee and the total package cannot cost more than £2,500. If an employer is using a salary sacrifice arrangement, the company can also make savings through a reduction in NI contributions on the amount of their employee's salary sacrificed. However, for low paid employees, this can be a problem if any reduction in cash pay puts them below the national minimum wage.

Mobile phones are another employee benefit to emerge in line with advances in technology. Prior to the 1999 Budget, mobile phones carried a tax charge if they were used for any private calls. This restriction was removed, after employers complained about the onerous task of record keeping.

Pensions have dominated the past eight years. With the previous Conservative government having already reduced the dividend tax credit for pension schemes, in 1997 Brown removed it believing shortfalls would be made up through gains in capital growth. Unfortunately this coincided with stock market falls and many believe this directly contributed to pensions deficits.

When it comes to the taxation of pensions, one of the biggest changes will happen in April 2006, when new legislation creating a single universal tax regime and a pension lifetime allowance of £1.5 million comes into effect.

"The way the limits work now make it hard to catch up if an employee defers payment," says Deborah Cooper, senior research actuary at Mercer HR Consulting. "Because the limits are much higher, employees have more control."

However, she believes further reforms are needed. "We need a change in the approach to state pensions to restore confidence and encourage employers and individuals to think it is worthwhile contributing to a pension scheme," she says. Clearly this is one debate that will rage for a long time yet.

Off the wall

When it comes to taxation legislation, we can sometimes enter the territory of the absurd. The introduction of tax and NI breaks for employers offering free 'cyclists' breakfasts' is a good example. Under general principles, such meals are a taxable benefit in kind, but a regulation was introduced to exempt them from tax, as long as they are provided on designated 'cycle to work' days. "Legislation allows for six events a year free of tax and national insurance liability, but I am unaware of how much they are used," says Simon Parsons, head of payroll processing and legislation at HR and payroll provider, Ceridian.