UK: Budget 2011 - Employment Taxes Issues


George Osborne's second Budget had few shocks, although the reduction in the headline rate of corporation tax seemed to have been a well-kept secret.

The main theme of the Budget was the reform of the nation's economy to encourage growth and jobs. Besides the reforms prompted by the Office of Tax Simplification's (OTS) reports, the Chancellor is anxious that the UK should be a location which appeals to international businesses. However, we wait to see whether the reforms now underway are sufficient to tempt businesses to move here.

Several changes in the income tax and NIC rates for 2011/12 were announced last year which means anyone earning over £42,475 pa will be paying more in income tax and national insurance from 6 April 2011, so they will certainly be feeling the pinch.

This Briefing Note highlights some of the employment taxes issues and covers:

  • personal tax and NIC rates and thresholds;
  • income tax and NIC reform;
  • IR35;
  • restricting pensions tax relief;
  • pension annuitisation at age 75;
  • disguised remuneration;
  • employer supported childcare;
  • reduced childcare relief for higher earners;
  • approved mileage allowance payments rates;
  • company car tax rate 2013/14;
  • fuel benefit charge;
  • van fuel benefit and van benefit charges;
  • Office of Tax Simplification: review of tax reliefs (late night taxis etc).

Personal tax and NIC rates and thresholds

Income tax rates and thresholds will remain at their 2010/11 levels in 2011/12, except where noted below. All rates and thresholds are set out in the Appendix.

The main and additional rates of NIC will increase by 1% for 2011/12. The primary threshold will rise from £110 to £139 per week and the secondary threshold will rise from £110 to £136 per week. The upper earnings and profits limits for NIC will be reduced by £1,400 so that they remain aligned to the higher rate threshold.

The personal allowance for under 65s will increase by £1,000 to £7,475 for 2011/12. However, the benefit of this increase will not be passed onto higher rate taxpayers as the upper threshold of the basic rate band will be reduced by £2,400 to £35,000.

For 2012/13, the personal allowance for under 65s will increase by a further £630 to £8,105. The benefit of this increase will be passed on in part to higher rate taxpayers as the upper threshold of the basic rate band will be reduced by £630 only, to £34,370.

From 2012/13 indexed rises to income tax and NIC thresholds (along with other direct taxes and individual savings accounts (ISAs)) will be linked by default to the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI) unless specified otherwise. However, employer NIC and age-related thresholds will continue to be indexed to RPI for the duration of this Parliament.

Comment: The rates and increases for 2011/12 had all been announced in previous Budgets. The Chancellor was at pains to stress that the 1% NIC increase and the 50% income tax rate had both been proposed by the previous administration. He also highlighted that his change to this inherited programme in raising the threshold for NIC softened the impact of the increase; overlooking that the Conservatives' campaign implied an intent to scrap the 1% NIC rate increase altogether.

The wider backdrop was to present the 50% income tax rate as necessary, but temporary. Linking threshold rises to the, historically, lower CPI is estimated to increase the annual tax take by over £1bn by the end of this Parliament.

Income tax and NIC reform

Over recent months both the influential Mirrlees Review and the recent report of the OTS into the taxation of small businesses have recommended that the Government should consider the merger of income tax and NIC.

In his speech the Chancellor made reference to the fact that income tax and NIC have operated as two fundamentally different systems, resulting in unnecessary costs for employers. He announced that the Government will consult on 'merging the operation of income tax and NIC'. The Budget report recognises that any change will be complex and involve a wide range of policy and implementation issues. It makes it clear that the contributory principle will be maintained and NIC will not be extended to individuals above the state pension age or forms of income other than earnings (for example pensions, savings and dividends).

Comment: It appears, therefore, that the Government is backing away from a full merger of income tax and NIC, with a single rate of tax on earnings. Instead, it appears to be thinking of keeping the two taxes running in parallel but with identical definitions.

Whilst this approach would improve the position slightly, the Chancellor is arguably missing a 'once in a generation' opportunity for a major simplification of the tax code by means of a full merger of the two taxes.

Nothing was said about employers' NIC. Employers' NIC is a major contributor to the total tax take, producing something in excess of £50bn a year, but it is essentially a payroll tax masquerading under a different name and it is unlikely that it will be scrapped.

The possibility of merging income tax and NIC is clearly a major issue and it is not going to be resolved any time soon, but in the meantime there is clear scope to modernise the current system for collecting NIC.

From 6 April 2011, Class 2 NIC will be collected on 31 July and 31 January (the same dates that income tax is payable), but by an entirely separate payment process. An individual who is both employed and self-employed has the right to defer paying Class 2 and 4 contributions until the precise liability is known after the end of the tax year, but this deferment process is paper based and outside the normal self-assessment system. Bearing in mind that all self-employed individuals are in the self-assessment system the OTS recommended that Class 2 and 4 NICs should also be brought within that system.


IR35 was announced by the previous Government in Budget 1999 as an anti-avoidance mechanism. Its purpose was to address the avoidance of tax and NICs on what might be employment income through the use of intermediaries, such as personal service companies or partnerships.

The OTS was asked to look at the issue of IR35 in response to the view that IR35 as it stands is not particularly effective, yet is administratively burdensome. The OTS report identified that this was a complex area with no clear consensus on the way forward. It offered three options:

  1. suspend IR35, with a view to abolishing the legislation permanently;
  2. retain IR35 legislation in its existing form but with explicit commitments from HMRC to make specified changes to the enforcement of the legislation; or
  3. consider the introduction of a genuine business test to exempt certain businesses from IR35.

The Government announced in the Budget report that it will retain IR35 because abolition would put substantial revenues at risk. However it has committed to make clear improvements in the way that IR35 is administered. These include setting up a dedicated helpline, producing guidance on cases that HMRC considers are outside the scope of IR35 and restricting reviews to high risk cases.

Comment: It is disappointing to see that the Government has failed to grasp the IR35 nettle.

IR35 is a symptom of an old-fashioned tax system which does not cope adequately with modern work patterns and which acts as a barrier to the enterprise culture that the Government wishes to encourage.

In short this is an area that needs some joined-up Government thinking, but the prospects for a review in the foreseeable future are now looking slim.

Restricting pensions tax relief

We had already been forewarned about the changes to tax reliefs on pension contributions and pension benefits before and at age 75. These were announced on 14 October 2010 and have been confirmed as follows.

Annual allowance

The annual allowance on which tax relief will be given will be reduced from £255,000 to £50,000 as of 6 April 2011.

Comment: For the past two tax years those earning more than £150,000 (including their pension contributions) were, effectively, limited to tax relief at their highest rate on contributions of no more than £20,000 except in specified circumstances.

The changes increase the contributions that high earners can get tax relief on at their highest marginal rate to £50,000.

This allowance replaces the complex tapering provisions which had been proposed by the previous Government and, all in all, the change is welcomed.

Tax relief on pension contributions has, for many years, been seen as a possible target. However, it is only in the past two years that governments have looked to reduce the relief available and as a result we should not take for granted that these reliefs will remain for the long term.

Carry forward of unused relief

As of 6 April 2011 it will be possible to bring forward unused annual allowance from the previous three fiscal years.

For those years falling before 2011/12, the possible unused annual allowance is measured against a notional £50,000 limit.

The ability to carry forward will be dependent on the individual having a registered pension scheme in those prior years rather than relevant earnings.

Comment: The reintroduction of the carry forward of relief was initially designed to help those with defined benefit schemes who have large pay rises. However, this change will bring opportunities for those limited by the special annual allowance charge in 2009/10 and 2010/11 to catch up in 2011/12. As tax relief on pension contributions at higher rates is still potentially a target this is an opportunity that investors should consider carefully.

Lifetime allowance

To the extent that individuals accumulate more than £1.8m in pension plans the excess is subject to a 55% tax charge. As of 6 April 2012 the lifetime allowance will be reduced to £1.5m.

Those individuals affected may elect by 5 April 2012 to adopt the current £1.8m lifetime allowance going forward, although they will not be able to accrue any further pension benefits after that date.

Comment: By reducing the lifetime allowance HMRC is limiting the amount of tax relief that any one individual can receive on their pension contributions over their lifetime.

Those with pension funds close to the £1.5m limit may need to address their strategy going forward and consider vesting and/or electing for the new form of protection by 5 April 2012.

Those who already have enhanced and primary protection are not affected by these changes.

Pension annuitisation at age 75

Currently individuals must vest their pension plans when they reach 75 and either buy an annuity or enter into a plan, from which they are obliged to draw an income.

From 6 April 2011 individuals will not be required to purchase an annuity at age 75, although their tax-free cash will be fixed at that date. If individuals do not vest their pension plan and subsequently die after age 75 the remaining fund will be subject to a 55% tax charge, and they will lose their entitlement to the 25% tax-free cash.

Comment: While these rules do enable individuals to pass on up to 45% of their remaining pension schemes on death they are not perhaps as flexible as originally thought. There is a possibility that deferring tax-free cash post-75 could mean it is lost and the death benefit rules for those with unvested schemes are less favourable than they are currently for those who have not reached 75.

Disguised remuneration

The Government is pressing ahead with its plans to clamp down on perceived tax avoidance through the use of third-party arrangements originally published on 9 December 2010. Following a consultation process, there are to be amendments to the proposed legislation. The amendments are to provide specific exemption from the very wideranging provisions for arrangements that are considered harmless. Further draft legislation will be published in the Finance Bill at the end of March with a new Explanatory Note.

The proposals for 'disguised remuneration' were well trailed, having been announced in the June 2010 Budget. Draft legislation was produced on 9 December 2010 which was extremely broadly drawn. The nub of the proposal was to ensure that the provision of loans to employees via third-party arrangements such as employee benefit trusts (EBTs) and employer-financed retirement benefit schemes (EFRBS) should be immediately taxed as employment income, liable to pay as you earn (PAYE) and NIC. This was to counter arrangements where such loans were made but in practice were not expected ever to be repaid. Such loans could be taxed only on the element of interest forgone as benefits in kind, if at all. These arrangements have been very popular. Similar arrangements involving the provision or setting aside of assets are also countered. Even a mere informal 'earmarking' of assets in an EBT or EFRBS could constitute a taxable event.

In addition, detailed anti-forestalling provisions introduced at the time meant that any loan or a payment made by an EBT or EFRBS could be immediately caught by the proposed new rules.

Comment: In the consultation period following the publication of the draft legislation, it was pointed out that, as drafted, the legislation could catch many entirely innocent arrangements for employees such as short-term loans to employees, possibly to fund the exercise of share options. Similarly, many long-term incentive plans that involve earmarking of funds to be paid over a period could also be caught.

The Government has accepted this criticism and has undertaken to limit the impact of the legislation in particular around genuine share plans and long-term incentive plans involving deferred remuneration. It will also now protect investment income and gains of earmarked funds and exclude existing pension savings.

Among the Chancellor's stated aims for taxes are 'that they should be certain and predictable... they should be simple to understand and easy to comply with'. It is to be hoped that the refinements of the proposed legislation also takes those aims fully into account. The risk will be that further complication is added to an already complicated picture.

Employer supported childcare: relaxation in the 'open generally' condition

The limited exemption for employer supported childcare only applies if a number of qualifying conditions are met. One of the conditions is that the employer's assisted childcare scheme must be open generally to all employees (or all the employer's employees at a particular location). Most employer supported childcare schemes are provided either through salary sacrifice or flexible benefit arrangements where pay is sacrificed in exchange for childcare vouchers. Salary sacrifice cannot be permitted by an employer where the employee's pay would be reduced below the national minimum wage and consequently the scheme rules restrict access to employees who might be affected. That restriction would, on a strict interpretation, disqualify the whole employer supported childcare scheme. This change is being made, with retrospective effect, to iron out this technical difficulty.

Comment: The limited tax exemption for employer supported childcare was introduced from the 2005/06 tax year and the requirement that an employer's scheme should be open to all was contained within the original legislation. Welcome amendments are being made to allow an employer's scheme to qualify, despite a restriction concerning low-paid employees, if the scheme is provided through salary sacrifice or flexible benefits arrangements. The amendments will have effect for 2005/06 and subsequent tax years.

The full exemption for employer provided workplace nurseries will not be affected by this change. Although the legislation that provides for exempt treatment contains the same qualifying condition (that use of the facility must be open to all) it is believed that access to workplace nurseries is not provided through use of either salary sacrifice or flexible benefits and therefore low-paid employees are not routinely excluded.

Reduced childcare relief for higher earners

As previously trailed, the monetary value of the limited tax exemption that is provided through an employer supported childcare scheme (providing childcare vouchers or directly contracted childcare) is to be capped for employees who first join their employer's scheme on or after 6 April 2011. This will be achieved by retaining the current tax exempt limit of £55 per week for basic rate taxpayers but introducing two new reduced limits of £28 per week for those liable to tax at the higher rate (40%) and £22 for employees liable at the additional rate (50%). For those affected, the exception from Class 1 NIC will also apply to the same weekly amounts.

Higher and additional rate taxpaying employees who already participate in an employer supported childcare scheme before 6 April 2011 are unaffected by this change so long as they continue to participate.

Employers will be responsible for deciding whether an employee who joins their scheme on or after 6 April 2011 will be liable to tax at the higher or additional rate. The analysis must be carried out by the employer when the employee first joins the scheme and immediately before the start of each subsequent tax year while the employee continues to participate. If the employer provides more than the appropriate capped amount of childcare support, Class 1 NIC (employer's and employee's) has to be applied through the payroll to the excess, which must also be declared on the employee's form P11D.

Comment: The intention that lies behind this measure is to limit the monetary value of the tax relief provided for employer supported childcare schemes to just £11 a week, whatever the recipient's marginal rate of tax. The mechanism chosen to implement the policy decision places a significant administrative burden on employers. HMRC must be hoping that those employers will decide not to provide childcare assistance that exceeds the capped amounts; if not it would be faced with tax underpayments that have to be coded out and otherwise collected.

The employer is required to estimate the likely level of the employee's income for a tax year, in advance, and once this is done the assessment cannot be changed. The likelihood that the estimate will produce an 'incorrect' result for individual employees at the margins of the rate bands seems to be high.

Approved mileage allowance payments rates from 2011/12

Where employees use their own cars for business mileage they can claim reimbursement from their employers through the approved mileage allowance payments (AMAP) rates. If reimbursement is within the prescribed limits it is not regarded as a taxable benefit. The limits are currently 40p per mile for the first 10,000 miles of business use and 25p per mile thereafter. Where individuals are paid less than the prescribed amounts by their employer, they can claim mileage allowance relief (MAR) for the residual amount.

There is to be an increase from 40p to 45p in the rate for the first 10,000 miles, per mile with effect from 6 April 2011. The rate will also apply to MAR.

Volunteer drivers may reclaim the actual cost of motoring expenses from the relevant voluntary organisation as long as they keep records to demonstrate that no taxable profit has been made, but, for administrative ease, they are allowed to use the AMAP rates if preferred. In addition to claiming AMAP rates, an allowance for passenger payments is currently in place for employees of 5p per passenger per mile which will be extended to volunteers.

Comment: The 40p rate has been in place since 2002/03 and has never been increased. This increase is most welcome in view of increasing fuel costs.

Company car tax rate 2013/14

Legislation will be introduced in Finance Bill 2011 to reduce the appropriate percentages by 1% for all vehicles with carbon emissions between 95g and 220g from April 2013. Zero emissions cars will remain at 0% and ultra-low emissions cars with emissions up to 75g will remain at 5%.

Fuel benefit charge 2011/12

Employees and directors who are provided with a company car and who also receive free fuel from their employers are subject to the fuel benefit charge. The cash equivalent of the taxable benefit is determined by multiplying a set figure (currently £18,000) by the appropriate percentage for the car, based on its CO2 emissions (grams per kilometre).

The level of the set figure increased to £18,800 with effect from 6 April 2011.

Van fuel benefit charge 2011/12 and van benefit charge 2011/12

The Government announced a freeze in the level of van fuel benefit charge at £550 for 2011/12. The van benefit charge will also be frozen at £3,000 in 2011/12.

Office of Tax Simplification: review of tax reliefs (late night taxis etc)

Prior to the Budget, the OTS produced a detailed report looking at 155 reliefs. In the Budget report, the Government signalled its intention to abolish 7 obsolete reliefs this year and then abolish a further 14 next year after a period of consultation. This second list includes, amongst others, luncheon vouchers and the provision of late night taxis.

The OTS made the point that the current relief for late night taxis distorts the tax system because the relief only applies to employees who have to work late on an exceptional basis, but does not apply to those who regularly work late. It suggests that late night taxis could be better dealt with via the PAYE Settlement Agreements (PSA) process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.