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Darling's reality check for bank bonuses
NIC increase - 'an income tax hike in all but name'
Rate change increases VAT cost

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Darling's reality check for bank bonuses

The Chancellor has announced a temporary 'bank payroll tax' in respect of discretionary bonuses in excess of £25,000 paid by banks and companies within banking groups.

The tax, to be levied at 50% on the excess of any bonus over £25,000 and to be paid by the banking institution, not the individual, will apply to payments made to employees between the time of the announcement on 9 December 2009 and 5 April 2010. There is an exception for bonuses paid under a contractual obligation already in place at the time of the Pre-Budget Report (PBR).

The tax will be payable by banks on 31 August 2010 and will not be deductible for calculating banks' corporation tax liabilities. While the tax will not affect the employee's own income tax and national insurance liabilities, the measure is intended to make banks think twice about awarding bonuses before 5 April 2010. Individuals may therefore find themselves with reduced 'net bonuses' as a result.

For example, if a higher rate tax-paying bank employee receives a gross bonus of £100,000 during the bank payroll tax period then the net bonus for the individual would be £59,000 which is unchanged by the PBR. However the cost to the company (taking into account corporation tax relief) would rise from £81,216 to £118,716. In what may seem to be an unfair double standard, the banks will not be able to claim a corporation tax relief on the bank payroll tax. From 2010/11 the increased tax burden on the employer disappears but may shift to the individual owing to the introduction of the 50% tax rate for income above £150,000, and a further 1% increase in National Insurance Contribution from 2011/12.

The Government hopes this measure will encourage the banks to rebuild their capital base rather than paying out large bonuses shortly after the huge injection of taxpayer funds into the sector. However it will be a difficult balancing act to make the sums add up and to ensure they do not lose their key staff who have become accustomed to a certain level of reward.

NIC increase - 'an income tax hike in all but name'

The Chancellor announced in this Pre-Budget Report that from 6 April 2011 National Insurance Contributions (NIC) will rise by 0.5% for the self employed, employees and employers. However, when combined with the 0.5% rise already announced in the 2008 Pre-Budget Report this gives a much steeper 1% overall increase.

Along with this announcement the Chancellor pledged that the NIC primary threshold would rise by £570 with the effect that individuals earning £20,000 or less would not be affected by these increases.

The rates of Class 1 primary NIC will rise from 11% to 12% below the upper earnings threshold, and from 1% to 2% above that. Class 1 secondary NIC (paid by employers) will rise from 12.8% to 13.8%. For the self employed, Class 4 NIC will rise from 8% to 9% and 1% to 2% (for the additional rate).

It is employers who will be left shouldering the greatest burden. Employers are set to pay an additional £5 billion NIC in 2011/12, with employees and the self employed paying an extra £5.03 billion. This means the total additional NIC raised in 2011/2012 will be in excess of £10 billion.

For Lower earners the overall effect is neutral. Middle income and higher earners can expect to pay an increased amount of NIC going forward.

Given that HM Treasury's tax ready reckoner estimates that an increase of 1p in the basic rate of income tax raises approximately £4 billion in 2011/12, this hike in NIC could be seen as a reversal of the previous Chancellor's cut in the basic rate of income tax introduced in 6 April 2008.

Rate change increases VAT cost

The Chancellor confirmed that from 1 January 2010 the standard rate of VAT will revert to 17.5% from its current rate of 15%. Although expected, the rate increase is bad news for consumers and businesses that cannot recover all or any of the VAT which they incur.

All businesses will need to amend their systems and prices to ensure they are ready for the increase. However, although the change takes effect from midnight on 31 December 2009, businesses that remain open into the early hours of New Year's Day such as bars and restaurants, will not have to implement the increase until 6am.

Businesses that raise invoices should consider doing so in December so that their customers benefit from the lower rate. Although measures have been introduced to prevent this from being abused, they should not affect normal commercial billing arrangements with third parties.

Where invoices cannot be raised prior to 31 December, it may still be possible for work done or goods made available prior to that date to be taxed at the lower rate. Service providers wishing to take advantage of this rule will need to consider how to value services performed before and after 31 December.

The Chancellor also confirmed a change for small businesses that declare their VAT liabilities using the Flat Rate Scheme. From 1 January 2010, the flat rates used to calculate the amount of VAT payable will be increased.