Tax implications of the pre-Budget report

The Chancellor’s first pre-Budget report is likely to dampen employers’ spirits following tax changes

Employers and their staff were hit hard by the government’s pre-Budget report, announced by Chancellor Alistair Darling (pictured) last month.

Some employers have been left reeling by decisions to axe the national insurance savings made through holiday pay fund schemes, to review the tax treatment of benefits-in-kind and to increase capital gains tax (CGT), which could have the unintended consequence of damaging sharesave scheme take-up.

From April 2008, the government plans to increase CGT to a new flat rate of 18%. This will be an increase of as much as 13% for some employees who have owned shares for more than two years, as CGT is currently set at 10% for higher-rate tax payers and 5% for basic-rate tax payers.

Mike Landon, principal at Mercer, said: “Most employees in share schemes will be unaffected by the CGT changes, the reason being that for almost all of them, any gains will be covered by an annual exemption of £9,200.”

Phil Ainsley, senior manager, employee benefits at Equiniti, formerly Lloyds TSB Registrars, said: “Companies that offer share plans will need to communicate to employees if they feel they are going to be disadvantaged, but the number of people [affected] and the overall value will be small.”

Inez Anderson, tax director at Smith and Williamson, added: “The change to CGT is more unexpected than the changes to tax and national insurance contribution (NIC) exemptions, because it goes against this government encouraging entrepreneurship.”

The government also announced that it is to launch a consultation on the tax treatment of benefits-in-kind and abolish the £8,500 threshold under which employees do not pay any tax on benefits.

Anne Croft, counsel at legal firm Linklaters, said: “I am not sure what the government’s motive here is. This is another way of raising taxes at the expense of lowly-paid employees, although this would make life easier for employers in reporting tax.”

In respect of company cars, the government also moved to increase the increase the fee paid by employers that have decided to meet the cost of private fuel for their drivers from April 2008.

Increasing the cost of providing such a benefit for drivers is an attempt by the government to cut the amount of personal miles that employees drive, and links in with the government’s green policy.

NIC exemptions were also removed from holiday pay fund schemes for all employers from last month, although those in the construction industry are being allowed a five-year transition period.