PBR 09: Employees to opt for lower salaries after NI hike

A growing number of employees are expected to ask for a pay cut over the next few years, tax experts believe.

A rise in "salary sacrifice" schemes - in which employees get bigger pensions, bigger share schemes or subsidised meals in return for a lower salary - is likely to be one of the unintended consequences of measures to increase National Insurance in the pre-Budget report earlier this week.

The 0.5% increase in NI contributions for employers, employees and the self-employed, from 2011, will net the taxman more than £3bn a year, according to Treasury figures.

It will mean that the NI rate will be at its highest since the 1970s, with the employers' rate rising to 13.8%, and the employees' rate to 12%.

The rise in the standard rate of NI has surprised some tax experts, who had expected the government to raise the upper annual earnings limit of £43,875.

Increasing NI, often described as an "invisible tax", is less politically controversial than increasing the income tax rate again. It will also rake in significantly more tax receipts.

The government is expecting to increase NI revenues by £3bn in 2011/2012 and a further £3bn in 2012/2013.

But what about NI loopholes? Businesses will try to minimise extra NI payments by offering salary sacrifice schemes.

However, they may struggle to get schemes past HM Revenue & Customs. In the PBR, the government said that from April 2011 it would tighten rules for legitimate subsidised or free meals for employees in relation to salary sacrifice schemes.

"HRMC has made it clear that it will take tough action against tax or national insurance avoidance schemes," said Inez Anderson, director for employment tax and incentives schemes at Smith & Williamson.

Other tax experts said they were worried the NI rises might stifle economic recovery.

Stephen Herring, senior tax partner at BDO, said: "I am particularly concerned the rise in employer's NI rise may inhibit improvement in the aggregate level of employment. In essence, employer's NI contributions represent a tax on jobs.

"We probably now know the full picture on NI increases, but we are only on the first chapter with regard to VAT and income tax."

He added: "Together with VAT and income tax, NI is one of the three largest tax collectors and this was a predictable response by an administration that has 'form' with previous NI raids."

IN OUR VIEW

Changes to NI are usually much less controversial than tinkering with income tax. The chancellor has been clever – this is pain that will be felt two years from now, when the economy is expected to be growing. But, will taxpayers be hit with further tax rises between now and then to bring down the deficit?