National Insurance Contributions planning pre-6 April 2011

6 April 2011 is also the date on which the starting rate for employee's NICs will increase from 11% to 12% (subject to special arrangements for contracted-out employment), with the rate for higher earners increasing from 1% to 2%. At the same time, the NIC rate for employer contributions will increase from 12.8% to 13.8%. Accelerating payments to occur before 6 April 2011 would benefit both employer and employee.

For example: A company with a monthly salary bill of £1 million, accelerating payment to before 6 April 2011 would result in a saving of £10,000 for the employer alone. Although it may technically be more difficult to accelerate salary to take advantage of lower NIC rates due to the application of regular earnings periods for NIC purposes, accelerating the payment of bonuses/vesting of share awards to avoid the increase is more feasible. This is because the payment of the bonus or shares (irrespective of the period to which it relates) will be part of the earnings period in which it is paid.

The acceleration of bonuses is particularly attractive for companies where the performance target has been achieved or is discretionary. For example, for a December year end company which normally only pays bonuses in May on the basis of performance to December, it would be financially prudent to pay the bonuses early in March since company performance would be known by then and the early payment would result in a saving for the company without the risk of targets not having been met. The situation would be different for a March year end company accelerating bonus payments, since it may not have definitive performance figures to act on (particularly as the figures will not have been audited).

There will be also be considerable commercial considerations for companies contemplating accelerating remuneration, such as additional cash-flow costs, what to do with employees who leave before the date on which the bonus would normally be paid or where targets are subsequently found not to be met, and not least the extra administration costs which may mean that it is not a worthwhile exercise. However, some companies will be able to benefit from work done last year in accelerating income to avoid the 50% tax bracket – except this time, acceleration would not be relevant just for a few employees, but for all employees and employers.

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