2007 Budget

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Significant steps towards tax and NICs alignment

The Chancellor presented his 2007 Budget to Parliament on Wednesday, 21 March 2007. While press attention has been focussed on the political issues raised by the tax rate changes announced by Gordon Brown and on which taxpayers will gain or lose from the measures, there has been relatively little comment on the significant step that is being taken towards aligning PAYE tax and Class 1 NICs.

The thresholds above which employees start to pay tax and NICs are already aligned - £100 a week from April 2007. By April 2009, the threshold at which the 40% higher tax rate applies and the NICs upper earnings limit will also be fully aligned.

In commenting on the changes to personal taxation, Chapter 5 of the Economic and Fiscal Strategy Report states:

"The Government is today also announcing important reforms to personal taxation. These are detailed earlier on in this chapter and include: changes to the starting and basic rates of income tax, increases in the higher rate threshold for income tax and in age-related income tax allowances, and aligning the UEL and UPL for NICs. As announced at Budget 2006, the Government is also conducting a review of the case for further alignment of the income tax and national insurance systems."

What next? Aligning gross pay for tax with gross pay for NICs? Taxation of benefits under PAYE with corresponding liabilities for Class 1 instead of Class 1A NICs? Cumulative Class 1 NICs? The two systems of employment taxation are still far apart but aligning the thresholds is an important first step.

The following notes describe all of the payroll-related changes announced in the 2007 Budget.

Income tax thresholds

There are no changes to income tax rates for 2007/08. As defined by the statutory calculation and rounding rules in section 1 of the Income and Corporations Taxes Act 1988, (from April 2007, section 21 of the Income Tax Act 2007), the thresholds for 2007/08 are increased in line with the year-on-year increase in the Retail Price Index (RPI) at September 2006 (3.625%) and are set out in the Table below.

The tax threshold changes require adjustments to Taxable Pay Tables, i.e. the Calculator Tables and Tables SR + B to D. They will be available on the Employer CD-ROM that will be sent to employers in the Employer Budget Pack. The new tax bands take effect from the first payday on or after 18 May 2007 (tax week 11).

Any changes to tax codes will be sent to employers on individual forms P6(T) or their electronic equivalents. Instructions on how to apply coding notices is provided on form P7(X), also included on the Employer CD-ROM. The tax code shown on any P6(T) forms dated 6 May 2007 should be applied as stated. No changes should be made to any other tax codes. No P6(T) forms will be issued after 6 May until 27 May 2007. All Tables and forms can also be ordered from the Employer Orderline, on 08457 646646.

Personal allowances

In addition to the personal tax allowance - £5,225 from 2007/08 - there are two age-related personal allowances. For 2007/08 these are £7,550 for those aged 65 to 74, and £7,690 for those age 75 and above.

From April 2008, the two age-related allowances will increase by £1,180 above the normal annual indexation increase, taking them to £9,000 or more. Indexed rises will be maintained in the following two years but, by 2011, the Government's intention is for the age 75 allowance to be £10,000.

Aligning the upper income tax and NICs thresholds

In 2001, the annual personal tax allowance was aligned with the annual Class 1 NICs earnings threshold. The effect is that a person entitled to the full personal tax allowance starts to pay both PAYE tax and Class 1 NICs at the same level of earnings - £5,225 for 2007/08.

From April 2009, the following three thresholds will all be aligned at the same figure:

• the basic rate limit (BRL), i.e. the annual threshold above which the higher rate of tax applies, after allowing for the annual personal allowance - £39,825 (i.e. £5,225 + £34,600) for 2007/08
  
  
• the annual Class 1 NICs upper earnings limit (UEL) - £34,840 for 2007/08
  
  
• the self-employed annual Class 4 NICs upper profits limit (UPL) - £34,840 for 2007/08.

Alignment of the upper thresholds will be achieved by:

• in April 2008, removing the 10% starting rate for earned income and pensions and reducing the 22% basic rate of tax to 20%
  
  
• in April 2008, increasing the UEL and UPL by £3,900 above indexation
  
  
• in April 2008, increasing the BRL by normal indexation
  
  
• in April 2009, increasing the BRL by normal indexation, increasing the UEL and the UPL to the same figure and then adding a further £800.

The following Table gives the actual thresholds for 2006/07 and 2007/08 and then estimates the thresholds for 2008/09 and 2009/10, using the statutory indexation rules based on a year-on-year increase in the RPI of 3% each year.

Managed Service Companies

From 6 April 2007, payments received by an individual providing services through a "managed service company" (MSC), if not already treated as employment income, will be deemed to be employment income and, as a result, subject to PAYE tax and Class 1 NICs.

Where an MSC incurs a PAYE/NICs debt which cannot be recovered from the company, the debt will transfer to one of a number of specified persons. Provided Royal Assent takes place before 6 August 2007, the transfer of debt provisions will take effect from that date in relation to debts incurred for directors or office holders of MSCs and MSC providers, and to debts incurred on or after 6 January 2008 for other persons.

Double Counting of Car and Car Benefit Charges

Extra-Statutory Concession A104 was introduced in July 2004 to remove an anomaly whereby employees earning less than £8,500 could incur a double tax charge where they are provided with car and car fuel benefits via an employer's credit card or voucher. Where the value of expenditure incurred by means of a non-cash voucher or credit card takes the employee's earnings rate to £8,500 or over, the employee would have to pay tax on the value of the voucher or credit card and on the provision of the car and, in addition, be taxed on the benefit of the car and any car fuel. ESC A104 prevents that situation from arising.

From April 2007, the ESC will be brought directly into legislation by amendments to the Income Tax (Earnings and Pensions) Act 2003, with no changes to its effect.

Company Car and Car Fuel Benefits

The following announcements apply to the car benefit and car fuel benefit charges:

• The car benefit percentage charge for the provision of a company car is between 15% and 35% of the list price of the vehicle. Currently, the 15% charge applies to cars with an emission rating of between 145 and 145g/km, and increases by 1% point for each further 5g/km, up to a maximum of 240g/km. From 2008/09 the minimum threshold reduces to 135g/km and this level will also apply for 2009/10.
  
  
• Discounts from the relevant percentage charge apply to some alternative fuel cars. From April 2008, a discount of 2% from the charge for an equivalent petrol-only car will apply to cars capable of using high-blend bioethanol E85, i.e. petrol mixed with up to 85% bioethanol. The code letter for use on form P46(Car) and form P11D will be 'G'.
  
  

  Bioethanol is a liquid biofuel made from starch plants (e.g. corn and wheat), sugar plants and some cellulose plants (trees). Production involves fermentation, distillation and dehydration. As a fuel, bioethanol can be used as a 5% to 85% blend with petrol. Petrol containing only 5% bioethonal can be used in all petrol engines. Engine modifications are needed, however, if the E85 blends are used.

  
  
• The provision of fuel for private use in a car that is subject to the car benefit charge is calculated by applying the car benefit percentage charge to a fixed "multiplier" value. The multiplier is £14,400 for the 2006/07 tax year and this value will also apply for the 2007/08 tax year.

Employee car ownership schemes

Budget 2006 announced that HMRC would review the taxation of employee car ownership (ECO) schemes and the benefits employees derive from them, with a view to possible changes. During summer 2006 and January 2007, HMRC's consultation with businesses demonstrated there are a number of different ECO schemes and that there is a noticeable interaction between the tax treatment of ECO schemes, tax-free mileage allowances (AMAPs) and rates of company car tax, which may have contributed to the popularity of ECOS.

The review also suggested that the more structured ECO schemes make extensive use of AMAPs to reduce their tax and NICs liabilities. HMRC is concerned that this may encourage employees to drive a greater number of business miles. Therefore, ahead of the 2007 Pre-Budget Report, the Government will consider the case for changing the structure of AMAPs to align the tax/NICs treatment and to ensure that rates and thresholds are set at an appropriate level to promote environmentally responsible business travel.

HMRC Reviews of Investigation Powers

In response to consultation, HMRC's investigation powers in England, Wales and Northern Ireland will be based on the Police and Criminal Evidence Act (PACE).

The appropriate powers and safeguards in PACE are those already applied to criminal investigations by HMRC concerning ex-Customs and Excise matters. They include:

• applying to magistrates and judges for search warrants
  
  
• applying to judges for court orders to obtain evidence from people other than the suspect
  
  
• arresting suspects, search upon arrest and questioning.

For Scotland, the measure will introduce new and consistent powers and safeguards for HMRC's criminal investigations including:

• applying to sheriffs for search warrants
  
  
• applying to sheriffs for court orders to obtain evidence from people other than the suspect
  
  
• provisions to help identify suspects and potential witnesses
  
  
• arresting suspects, search upon arrest and questioning .

HMRC Reviews of Penalties

Also following consultation, the Government is to introduce a single new penalty regime for incorrect returns for income tax, corporation tax, PAYE, NICs and VAT. Penalties will be determined by the amount of tax understated, the nature of the behaviour giving rise to the understatement and the extent of disclosure by the taxpayer. The regime also includes a new concept of suspended penalties.

Electronic Filing on In-Year PAYE Forms

The introduction of the requirement to file in-year forms P45 and P46 electronically is being delayed until April 2009 for large and medium-sized employers and until April 2011 for small employers. HMRC explains:

"This deferral to mandatory online filing of in-year information is made in response to employers' concerns about the complexity of the changes needed to their own internal processes. It gives large and medium-sized employers more time to prepare and become accustomed to the validation routines before penalties begin to bite in the last quarter of 2009-10. We will use the extra time to make sure that our systems will fully support employers, so that they can build their confidence in using them when they send data to us online."

The delay in starting mandatory electronic filing or in-year forms does not affect:

• the introduction of new P46 procedures from April 2008
  
  
• the requirement to send P46 information when an employee's earnings reach the NICs lower earnings limit instead of the earnings threshold.

Benefits from Employer Funded Retirement Benefits Schemes

The Government is adding to the list of benefits which, if provided to former employees from a non-registered pension scheme, are excluded benefits and, as a result, are not subject to a tax charge. The exclusion applies to tax year 2006/07 and onwards. The benefits are:

• non-cash benefits that were chargeable to tax before 6 April 1998
  
  
• certain living accommodation, namely
  
  
  • accommodation provided by local authorities, i.e. council houses provided on equivalent terms to other council tenants
    
    
  • accommodation provided for a former employee or, if deceased, for a family member and
    
    
    • the employee had lived there continuously for five or more years immediately prior to retirement,
      
      
    • the accommodation was not taxable because it was provided for the performance of the employee's duties, and
      
      
    • after retirement, the employee or family member continues to occupy the same or similar accommodation.
      
      
  • accommodation provided for a former employee
    
    
    • which was previously provided because the person was an employee,
      
      
    • which was not taxable because it was provided as the result of a security threat to the employee, and
      
      
    • following the end of the employment, those security threats continue.
      
      
• other non-cash benefits, namely
  
  
  • removal expenses and related insurances incurred in transporting domestic belongings of a former employee's former residence to the former employee's new residence
    
    
  • welfare counselling provided to a former employee that is also made available to all of the employer's pensioners on similar terms
    
    
  • recreational benefits that would be exempt from a tax charge if the former employee were still in employment
    
    
  • the provision of an annual party or similar annual function for which there would have been no tax charge if the former employee had attended as an employee
    
    
  • the provision of will-writing services for a former employee where the cost to the employer does not exceed £150
    
    
  • the provision of, or the replacement of, equipment for a disabled former employee that was first provided when the former employee was in employment and which, at that time, was exempt from a tax charge.

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