UK: New Employment Legislation

Last Updated: 30 April 2006
Article by James Libson and Joanna Blackburn

A raft of new employment legislation came into effect on 6 April 2006. The principal changes are outlined below, with further details following:

TUPE Regulations

The TUPE Regulations 2006 amended the 1981 version of TUPE. The basic principles remain the same, but there are significant changes to the application of TUPE to contracting out situations and there is a new requirement for the transferor to provide certain information to the transferee prior to the transfer.


New pension rules came into force which saw the most fundamental changes to pension legislation witnessed in years. The impact of the new rules could have a substantial effect on the pension and tax position of many people.

More on pensions

Businesses employing more than 150 employees will be required to undertake consultation before making any changes to occupational and personal pension schemes.

Increase in maternity and statutory sick pay rates

The rate of statutory maternity pay increased from £106 to £108.85 per week with effect from 2 April and the standard rate of statutory sick pay increased from £68.20 to £70.05 per week from 6 April.


After much delay, the new Transfer of Undertakings (Protection of Employment) Regulations finally came into force on 6 April 2006. The TUPE Regulations provide employment rights to employees when their employer changes as a result of a transfer of an undertaking. In its simplest form, the effect of the Regulations is to preserve the continuity of employment and terms and conditions of those employees who are transferred to a new employer when a relevant transfer takes place. The Regulations also contain specific provisions to protect employees from dismissal before or after a transfer.

The new Regulations introduced the following changes:

  • A widening of the scope of the Regulations to cover cases where services are out-sourced, in-sourced or assigned by a client to a new contractor (described as "service provision changes")
  • A duty on the transferor to supply information about the transferring employees to the new employer (by providing what is described as "employee liability information")
  • Special provisions making it easier for insolvent businesses to be transferred to new employers
  • Provisions which clarify the ability of employers and employees to agree to vary contracts of employment in circumstances where a relevant transfer occurs
  • Provisions which clarify the circumstances under which it is unfair for employers to dismiss employees for reasons connected with the transfer.

The TUPE Regulations have long been regarded as a complex burden on businesses. It was hoped that these new changes would bring about much needed clarity and would make it easier for businesses and employees to understand where they stand on any transactions covered by the Regulations. Whether these hopes are met in practice is, of course, another matter. Inevitably, the Courts will still be burdened by complex and expensive TUPE litigation.


On 6 April 2006, the UK pension system saw its most radical overhaul of the past fifty years.

The key changes arising from the new rules are as follows:

  • Previously, there were limits on how much could be invested in a pension, and depending on the type of pension, different limits on the amount of benefits that could be paid on death or retirement. The new rules sweep away this complexity and from A-Day, everyone will have allowances. These allowances may be exceeded, but any amounts above the allowance will be subject to tax.
  • The annual allowance on pension contributions for the 2006/07 year will be £215,000, rising by £10,000 each year to £255,000 in the 2010/11 tax year. Any contributions in excess of the annual allowance will be subject to income tax at 40%. Individuals will be entitled to income tax relief on their personal contributions of up to 100% of their annual earnings.
  • A lifetime allowance will replace all previous benefit limits. This is the total value of pension savings that will have benefited from tax relief when the contributions were made. When pension funds are crystallised (i.e. when the pension is drawn), the value of all pension arrangements being crystallised will be tested against the lifetime allowance. Any amounts above the lifetime allowance will be taxed at 25% if taken as pension income (which is then subject to income tax) or taxed at 55% if taken as cash. In 2006/07 the allowance has been set at £1.5m, rising yearly to £1.8m by 2010/11.
  • Certain transitional protection exists for those with pension funds already in excess the lifetime allowance at A-Day, or where their pre A-day entitlement may exceed the lifetime allowance in the future. This protection must be registered by the individual with the Revenue by no later than 5 April 2009.

Currently, many employers provide benefits for employees that are restricted by reference to the Inland Revenue "earnings cap". To ensure a smooth transition to the new regime, Regulations have been introduced to preserve the effect of the earnings cap for a transitional period of five years. The earnings cap for 2006/07 tax year is £108,600. Employers will need to consider how and to what extent their pension rules will need to be amended (by no later than 5 April 2011) to ensure compliance with the new rules when the earnings cap will no longer apply.

As a result of the new rules, employers may also see their key executives seeking to renegotiate their remuneration packages to avoid the potential tax charges if their pension benefits will exceed the lifetime allowance.


Maternity leave often raises many difficult issues. One of these issues is the extent to which a woman on maternity leave is entitled to her full bonus during that leave. The Court of Session in the case of Hoyland v Asda Stores Ltd has recently considered the Scottish EAT's decision that Asda was entitled to reduce the bonus payment to Ms Hoyland to reflect her absence from work during maternity leave.

Ms Hoyland's case involved a bonus scheme operated by Asda which rewarded all employees for their contribution to the business during the bonus year. However, each individual bonus was subject to being pro-rated to reflect attendance records throughout the bonus year.

The Court of Session upheld the Scottish EAT's decision that Asda was entitled to make the pro-rated deduction and that Ms Hoyland was therefore only entitled to her bonus in respect of the period that she was at work during the bonus year and for the two weeks of compulsory maternity leave immediately after childbirth.

Although this case is helpful to employers, the decision turned on its own particular facts, namely that the bonus was linked to the employee's individual performance and that it was an established term of the scheme that the bonus was attendance related. Whether or not a woman on maternity leave is entitled to a bonus payment continues to be a grey area and much will depend upon the type of the bonus and the rules of the scheme.

This article is only intended as a general statement and no action should be taken in reliance on it without specific legal advice.

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