Pre-Budget Report: NI changes will boost salary sacrifice

The Chancellor, Alistair Darling, has announced an increase in employer and employee national insurance contributions (NICs) of 0.5% that will take effect from 2011 and which could have the long-term impact of boosting employer interest in salary sacrifice arrangements.

Graham Farquhar, head of global employment at Ernst and Young, said: “The good news is that the government has not moved to restrict salary sacrifice. This rise in NI will make [salary sacrifice] more attractive to employers, particularly [with regard to] pension contributions.”

The delay in the implementation of the increase in NI will give employers plenty of time to start planning tax-efficient schemes to off-set the rising cost by offering salary sacrifice arrangements around pensions, childcare vouchers and cycle-to-work schemes.

In his Pre-Budget Report, the Chancellor also raised taxes for big earners by introducing a new higher rate tax band of 45% for those employees on £150,000.

An expected temporary cut to value added tax (VAT) of 2.5% was also announced in the pre-Budget Report, which will come into effect on 1 December and last until 2010. There was little respite for fleet managers as fuel duty was increased offsetting the 2.5% cut in VAT.

However, fleet managers received a welcome break on vehicle excise duty. Although six new bands are to introduced in 2009 as expected, the maximum increase has been lowered to £30 and deferred until 2010.

On pensions, the government has frozen the life time allowance at £1.8 million for a further five years, up to 2015/16. The annual allowance will also be held constant at £255,000.

Alistair Darling also announced new measures to help people into work during the expected recession, extending the Train to Gain programmes to provide support to individuals in pre-redundancy situations enabling them to develop skills to find work.

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Barry Marshall, UK head of tax, PricewaterhouseCoopers, said: “The Chancellor announced a significant number of initiatives intended to support the economy – more than anticipated. It will take time to see how business reacts to these changes.”

Have your say about the Pre-Budget Report on the Employee Benefits Forum.