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Tax and NICs thresholds
Simon Parsons on 2011/12 Tax and NICs thresholds
On 2 December 2010, HM Treasury published an updated Tax and National Insurance Contributions (NIC) Rates and Threshold applicable to the 2011/12 tax year. Although we knew some of these already from the June 2010 Budget, it’s still worth reminding ourselves of the changes that payroll teams and employees are yet to face.
One of the biggest changes includes the separation of the former Earnings Threshold into the separate Primary Threshold (PT - the point where employees commence any NIC liability) and the Secondary Threshold (ST - the point where employers commence any NIC liability). So, for the first time in history, the PT is to be higher than the ST!
So what has HM Treasury confirmed and is there anything different to what was predicted?
Tax rates and tax bandings
Tax rates will remain unchanged, with 20% Basic Rate, 40% Higher Rate and 50% Additional Rate. The main difference to watch out for in the 2011/12 tax year will be the introduction of the new tax code D1 (where you’ll have to deduct 50% tax).
Another change that has been confirmed is to tax bandings, where the Basic Rate band will be reduced from the current £37,400 to a new lower value of £35,000. However, the application of the Additional Rate tax will remain on earnings above £150,000 (causing an increasing population of 50% tax payers), and the Higher Rate will be applicable to all earnings in between. Please see our guidance below:
| Basic Rate (20%) | £0 - £35,000 (formerly £0 - £37,400) |
|---|---|
| Higher Rate (40%) | £35,001 - £150,000 (formerly £37,400 - £150,000) |
| Additional Rate (50%) | Over £150,000 |
Personal, Married Couples and Blind Persons Allowance
As announced in the emergency budget by the chancellor and as a concession to the Liberal Democrat coalition partners, the personal allowance (for those under 65) will be increased by £1,000 to £7,475. A swathe of lower paid employees will be removed from PAYE tax. Also note, there’s a smaller increase of £450 in relation to those aged 65-74 (now £9,940) and those aged 74 and over (now £10,090).
A small adjustment has also been made to the married couples allowance (available to individuals born before 6th April 1935) with a £330 increase (now £7,295) to the maximum and £130 increase (now £2,800) to the minimum.
The Blind persons allowance has also increased by £90 to £1,980.
However, personal allowances are impacted by earnings and may reduce when exceeding certain limits. The Income Limit for under 65 personal allowance remains unchanged at £100,000. So an individual will lose £1 of free pay for every £2 that exceeds £100,000 earnings until there is no remaining entitlement. This is not a payroll calculation, but an assessment that is made against the individual by HM Revenue & Customs and may be included in any tax code issued. Therefore, any under or overpayments will need to be recovered through the operation of Self Assessment.
Flexible Benefits & Salary Sacrifice schemes
Many employers are now operating flexible benefit schemes or salary sacrifice arrangement for employees to be advantaged from tax and NICs free Benefits In Kind (BIK). It may now be time for employers to review such schemes (especially when applicable to the lower paid) to ensure that there is continued tax and NICs savings.
National Insurance Contributions and the new thresholds
The other confirmation that has been awaited is the application of National Insurance Contributions and the new thresholds. HM treasury has confirmed the following weekly based values:
| Lower Earnings Limit (LEL) | £102 |
|---|---|
| Primary Threshold (PT) | £139 |
| Secondary Threshold (ST) | £136 |
| Upper Accrual Point (UAP) | £770 |
| Upper Earnings Limit (UEL) | £817 |
Primary (Employee) Contributions are now assessed as follows:
| Below £102 (LEL) | Nil (NIC rate) |
|---|---|
| £102 - £139 (PT) | 0% NIC rate (NIC rate) |
| £139 - £817 (UEL) | 12% (NIC rate) |
| Above £817 | 2% (NIC rate) |
So earnings above the UEL have seen a 100% increase in NIC liability for employees.
Rebates on primary NICs for Contracted Out schemes (both COSR and COMP) apply to earnings between the LEL and the Upper Accrual Point (UAP) and remain at 1.6%
Married Women’s reduced rate for those that remain qualifying will increase to 5.85% (from 4.85% - a 20.6% rise).
And finally... Secondary (Employer) Contributions are now assessed as follows:
| Below £102 (LEL) | Nil (NIC rate) |
|---|---|
| £102 - £136 (ST) | 0% (NIC rate) |
| Above £136 | 13.8% (NIC rate) |
The contracted out rebate is 3.7% for COSR schemes and 1.4% for COMP schemes based on earnings between the LEL and the UAP.
View other recent articles by our resident expert, Simon Parsons:
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