UNITED KINGDOM: Increase the tax burden for higher paid employees

    BUDGET SPECIAL

Introduction

In the recent budget, the
UK Chancellor has announced the introduction of measures which will significantly
increase the tax burden for higher paid employees. A brief summary of the
changes is as follows:

·         
An increase in income tax
rates and phasing out of personal allowances for higher earners;

·         
Restrictions on tax relief
for pension contributions for higher earners;

·         
New obligations for
companies’ Senior Accounting Officers; and

·         
A proposal for tougher
penalties for late payment of income tax deducted through PAYE.

    Tax Rate Changes

Currently, the top rate of
income tax in the UK is 40%, payable by those earning more than £43,875
(approximately US$72,130), with the income tax-free personal allowance
generally available regardless of the level of the employee’s income. 
However, with effect from April 6, 2010, a new 50% income tax rate is to be
introduced for those earning more than £150,000 (approximately US$246,476)
per annum. In addition, the personal allowance will be phased out for those
earning £100,000 (approximately US$164,328) or more. The allowance will be
reduced by £1 (approximately US$1.64) for every £2 (approximately US$3.28) of
income above the threshold, with complete phase out occurring when income
reaches £112,950 (approximately US$185,603). The changes will introduce an
effective rate of income tax of 60% on income between £100,000 and £112,950
(approximately US$185,603).

The tax rate increase and
phase out of the personal allowance will have a particularly significant
impact on the cost of bringing expatriate employees to the UK on a tax
equalized basis, as the top grossed-up income tax rate will rise from 67% to
100% (assuming UK social security is not also payable).

Furthermore, it has been
announced that, with effect from April 6, 2011, both employer and employee
social security contributions will increase by 0.5%. The rate for employers
will become 13.3% (uncapped). The rate for employees will become 11.5% up to
the upper earnings limit, and then 1.5% uncapped.

    
Tax relief for pension contributions to be restricted

Higher rate income tax
relief is being restricted for contributions by or on behalf of individuals
to   UK registered pension plans (and potentially overseas pension plans).
The proposal is that higher rate relief will be tapered away for those with
taxable incomes of between £150,000 and £180,000 (approximately US$295,433)
from April 6, 2011 so that for those with incomes above £180,000
contributions will only benefit from basic rate tax relief. The exact
mechanism for applying these rules has not yet been confirmed.

Provisions applying from April
22, 2009 (the date of the Budget) will also prevent the forestalling of the
new rules. For the tax years 2009/10 and 2010/11, individuals with incomes of
at least £150,000 in the year, or any of the preceding two tax years could be
impacted. Steps taken to reduce income below £150,000, for example by
entering into salary sacrifice arrangements set up after April 22, 2009, will
be negated by adding back the amount sacrificed.

There will be a special
annual allowance of £20,000 (approximately US$32,808) applied to any pension
savings that exceed the individual’s normal established pattern of
contributions. Contributions in excess of this level will be taxed at 20% for
2009/10 and will be collected via self-assessment. From 2010/11, when the 50%
top income tax rate takes effect, indications are that this special allowance
charge may increase to 30%.

The provisions are complex
and specific advice should be sought as appropriate.

    
Senior Accounting Officer

The Budget introduced a new
provision whereby the Senior Accounting Officer of large companies will be
required to ensure that the company and/or group’s accounting arrangements
are such that the taxes and duties of the company or group can be calculated
accurately.

The provisions will mean
that it is necessary for an individual within the company to be named to HMRC
as the Senior Accounting Officer. That individual will be responsible for tax
reporting on behalf of the company and its subsidiaries−and the key provision
is that the named individual will be personally liable if the tax
liabilities of the company are incorrectly calculated or paid late to HMRC.

   
Tougher penalties for late payment of PAYE

Large employers in the UK
are required to operate withholding and pay the amounts withheld to HMRC on a
monthly basis. Finance Bill 2009 will introduce a stricter regime in relation
to the penalties for late filing of tax returns and late payment of tax. Of
particular significance for employers is that HMRC have confirmed their
intention (as indicated in the 2008 Pre-Budget report) to charge penalties
where PAYE due to HMRC is paid late.

Large employers in the UK
are required to operate withholding and pay the amounts withheld to HMRC on a
monthly basis. Finance Bill 2009 will introduce a stricter regime in relation
to the penalties for late filing of tax returns and late payment of tax. Of
particular significance for employers is that HMRC have confirmed their
intention (as indicated in the 2008 Pre-Budget report) to charge penalties
where PAYE due to HMRC is paid late.

    ACTION

    Companies should consider the following:

·         
With the increased rates of
income tax and social security, employers should focus on compensation
strategies that deliver gains which fall within the capital gains tax regime
(CGT). This can include HMRC approved plans where possible and other tax
efficient planning arrangements.

·         
In addition to the
recognized tax-advantaged plans (EMI, CSOP, SAYE, SIP), the Approved
Performance Share Plan (“APSP”), an idea developed by Deloitte, can also be
taken into account for tax planning purpose. This plan replicates the
commercial characteristics of a performance share plan (broadly a free share
plan) but is more tax efficient. In particular, it allows employers to
deliver free shares to employees with the growth in value of the first
£30,000 (approximately US$49,217) of shares awarded falling within the more
beneficial CGT regime.

·         
The proposed higher income
tax and social security rates will also have a significant impact on Deferred
Bonus Plans−when any bonuses deferred are expected to vest after April 2010,
when the increased rates are due to be in effect. We therefore expect
employers to consider the possibility of accelerating the vesting of bonuses
to before April 6, 2010 to avoid the increased rates.  A more detailed note
on these issues is available.

·         
In light of the proposed
increase in PAYE penalties, employers will want to ensure that they have
systems in place to correctly withhold tax and remit these sums to HMRC on a
timely basis. This can be particularly challenging where employees have
incentive plan gains and/or where mobile employees are involved.

·         
It is likely that existing
pension arrangements for those earning above £150,000 will become
significantly less attractive in the new environment. There will need to be a
fundamental reassessment of the approach to pension funding and management.

·         
With the new obligations
for a named Senior Accounting Officer combined with tougher penalties for
late payment of PAYE, it is more critical than ever to ensure that compliance
is correctly carried out.

People to Contact

For assistance in this
matter or any other issue related to the operation of your global rewards
plans, please contact your local Deloitte global rewards consulting services
advisor or email us at: globalequity@deloitte.com and a global rewards consultant will contact you.

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