News analysis: How the Finance Bill 2011 will impact reward

The Finance Bill 2011 contains several measures that affect the way employers reward and remunerate staff. In December’s publication of the draft bill, the government confirmed it would clamp down on arrangements that use employee benefits trusts (EBTs) to reward staff in a way that looks to avoid, defer or reduce tax liabilities.

The legislation, which also applies to employer-financed retirement benefit schemes (Efrbs), will ensure income tax is payable when a third party, such as an employer, ‘earmarks’ funds for a reward, recognition or loan in connection with an employee’s employment.

Andy Goodman, tax director at BDO, is concerned the tax will also catch the innocent uses of EBTs, which are often used for long-term incentive plans. “Under the current drafting, the risk is that they catch very innocent things, so that ultimately, as well as reducing the use of EBTs for more aggressive planning, it will also impact on the use of EBTs on very standard and innocent planning,” he said.

“The real devil in the detail is exactly what ‘earmarking’ means. Organisations that continue using EBTs for anything need to make sure the steps the trust takes, however innocent, would not be construed as earmarking in the Revenue’s eyes.”

Carol Dempsey, reward partner at PriceWaterhouseCoopers, said urgent clarification was needed from HM Revenue and Customs as to whether the law, enacted as it is, would affect straightforward employee share plans.

“These new rules may leave employers between a rock and a hard place. The government, the Financial Services Authority, shareholders and remuneration committees all want bonuses to be deferred, and clawed back in the event of poor performance.

“These new rules are so wide-ranging that they actively discourage this. Employees could end up paying 52% tax and NIC before a bonus is paid, even if it is eventually never paid. At the moment, we are not sure whether this wide scope is intentional or is a side-effect. HMRC says the new rules are designed to catch disguised remuneration, but a normal, commercial bonus is not disguised.”

Another significant measure in the Finance Bill is the removal of the requirement for people to select an annuity by age 75. This comes into effect on 6 April 2011, and will allow individuals with defined contribution (DC) pensions savings, from which they have not yet taken a pension, to defer their decision to take the benefits. Staff with a lifetime pension income of at least £20,000 a year will be able to access their drawdown pension funds
without any cap on withdrawals.

Gemma Goodman, head of operations at the Annuity Bureau, said the change might impact on the fund choice for pensions.

“There are lots of knock-on effects. If an employee does not know when they are retiring and this change goes through, they should look at where their funds are invested now. An employee might be in a lifestyle-type fund, which [moves funds out of equities] as they get closer to retirement.”

Other measures in the Finance Bill 2011:
Pensions tax relief annual allowance reduced from £255,000 to £50,000, and lifetime allowance reduced from £1.8 million to £1.5 million.

Removal of the tax charge on borrowing linked to the cost of setting up, managing or administering the national employment savings trust (Nest).

Tax relief on childcare vouchers or directly contracted childcare restricted to 20%.

Qualifying conditions for employers that provide childcare through salary sacrifice or flex will change.

Personal tax allowance for those aged under 65 will increase to £7,475.

Level at which basic tax applies cut to £35,000.

Read more on legislative changes