Next year’s national insurance increases mean extra costs for employees and employers. But how much?

Earlier this year the Chancellor announced a 1% increase generally applied to all employer and employee national insurance rates. This included introducing a new 1% employee charge on earnings above the upper earnings limit (£30,420 per annum in 2002/2003). The new rates will be effective from April 2003. This, coupled with the reduction in the limit on carbon dioxide emissions for each car scale benefit rate, means increased costs for both drivers and the employer.

Table 1 looks at a typical employee driving a 1.8LX Mondeo. Reducing the carbon dioxide limit increases the percentage of the list price taxed from 19% this year to 21% next year and 23% in 2004/2005. This means that the Mondeo driver will see their tax bill increase by around 10% a year for the next two years.

The increased national insurance cost will not directly impact the employee’s take home pay but will add to the current Class 1A national insurance charged to the employer. The 1% increase would represent an extra 10% on top of current costs paid by the employer without any changes to the emissions based car scale benefit. However, as the employer must pay national insurance on the car scale charge, the effective cost increase is compounded to nearer 20%.

Assume basic rate taxpayer, not contracted–out of SERPS.
*Assumed rate

What happens to the private fuel charges? For the 2003/2004 tax year, tax on private fuel will be calculated as the car scale benefit percentage multiplied by a notional price of £14,400. The Class 1A national insurance charge will be based on this new fuel benefit. For our Mondeo driver, Table 2 shows us that there will be an income tax increase on the fuel benefit of around 6% per annum. Increasing the national insurance rate by 1%, when coupled with the new fuel benefit charge, would increase employer costs by 15% in this example.

Assume basic rate tax payer, not contracted-out of SERPS

Comparing Tables 1 and 2, you will note that the tax cost for providing private fuel for the Mondeo is now about the same as the tax cost for providing the car itself, when the actual private fuel cost is likely to be less than half the actual car cost!

Many companies provide a cash alternative to the company car. Increased national insurance rates will potentially impact both the employer and the employee who opts for cash. Table 3 sets out an illustration where the employer currently offers a £5,000 cash alternative. If the employer chooses to keep the employee in a net pay neutral position, the employer costs in this example could increase by 3%. This is a combination of the 1% additional employer’s national insurance cost and the 1% additional employee’s cost grossed-up to maintain neutrality.

Assume higher rate tax payer earning above the upper earnings limit for national insurance and contracted-out of SERPS

The increases to national insurance rates effective from April 2003 will increase the cost of operating fleets. When coupled with the increases in car scale benefits the compounded impact could be large. Fleet managers should review these costs now so they can be fed into next year’s fleet decisions.

Julian Sansum
Senior Manager
Deloitte & Touche