Pre-Budget report: Darling axes holiday pay fund schemes

The government has axed the national insurance (NI) exemption on holiday pay schemes from 30 October for employers outside the construction industry

Employers offering schemes in the construction industry, however, have five years to adjust to the changes, which were announced by Chancellor of the Exchequer, Alistair Darling, in the pre-Budget report. The government plans to axe the exemption because it was originally intended for the construction industries, but has been used by employers in other sectors, who according to the pre-Budget report, did so “solely to reduce their and their employees’ NIC liability, contrary to the original policy intention”.

Holiday pay fund schemes allow employers to pay funds into a third-party administrator which they reclaim when staff take leave. Previously, neither employers nor employees have been liable to pay NICs on this amount. It is lower-paid employees who tend to benefit most from the exemptions.

Gary Hull, employment solutions director at PriceWaterhouseCoopers, said: “To give five years notice to [the construction industry] is not unreasonable but still disappointing, if the overall impact will be detrimental to the construction sector who have been operating the scheme sensibly and rigorously for many years. The legislation was originally intended for the construction industry but I am not surprised that other organisations implemented schemes because the legislation was there to allow them to do it.”

Ann Dobson, commercial director of holiday pay fund provider Flexible Renumeration Services (FRS), added: “There was always a chance that this exemption would be removed. We are going to be analysing the regulations in some detail, but it is disappointing that one industry is being protected at the expense of others. This government is encouraging people to take holidays and increasing holiday entitlement, but at the same time they are burdening employers by not maintaining the [NIC] exemption.