National Insurance Contributions

In 2003/04 the starting point for employees’ NICs continues to be aligned with that for employers and the income tax personal allowance. Given that the personal allowance has been frozen at last year’s level the effect is that the 2003/04 threshold for NICs is £89 per week, the same figure as in 2002/03.

In addition, as announced in the 2002 Budget, for 2003/04, NIC rates for employers, employees and the self-employed have all been increased. For employers, the rate has been increased to 12.8% from 11.8% and for employees and the self-employed there is an extra 1% charge on all earnings or profits above £89 per week without limit.

Action points

Although employees’ NICs only become payable once earnings exceed £89 per week, any earnings between £77 and £89 per week in 2003/04 protect an entitlement to basic state retirement benefits without incurring a liability to NIC. Consider whether you are making full use of this rule.

Consider ways of reorganising remuneration packages, perhaps by using a salary sacrifice scheme, to save some NI. Broadly, an employee agrees to a cut in salary in return for which the employer then uses the sacrificed sum to provide a more NI efficient vehicle such as pension contributions or certain benefits in kind.

Company cars: fuel scale charge

As announced in the 2002 Budget, the way in which the company car fuel scale charge is computed has been changed significantly with effect from 6 April 2003. The fuel scale charge is applied where any private fuel is provided for a company car and, until 5 April 2003, depended on the engine size of the car. For 2003/04, the charge is linked directly to the CO2 emissions of the car. It is calculated by applying the percentage figure used to compute the company car benefit (generally between 15% and 35%) to a fixed sum set at £14,400 for 2003/04.


The maximum charge for 2003/04 under the new regime is £5,040. This represents a 20% increase on the maximum charge in 2002/03.

A further change allows the charge to be prorated where provision of private fuel ceases part way through the year. This will prove beneficial.
Action point

Review the position where private fuel is provided to check that sufficient private miles are being driven to warrant the charge.

Company cars and vans

In April 2002, the rules for the taxation of company cars were changed significantly. The charge is now based on the CO2 emissions of the car.

The rules relating to company vans have not been revised so that the maximum taxable benefit for a company van in 2002/03 and 2003/04 is £500 and this includes fuel for private use. This has led to some disputes as to whether certain vehicles are vans or cars.

The Chancellor has announced that consultation will now take place with a view to reforming the tax treatment of employer provided vans taking account of environmental benefits, fairness and modern working practices.

Personal Service Companies: domestic workers

In April 2000 rules were introduced to prevent the avoidance of tax and NICs by individuals providing their services to customers via an ‘intermediary’ (typically a service company) rather than directly. The rules apply to any contract or engagement where, for tax purposes, the individual (‘worker’) would have been treated as an employee of the customer had the intermediary not existed. The effect of the rules is to treat the income received by the company, net of certain expenses, as though it had been paid to the individual as salary thereby creating a liability to income tax and NICs.

However, the rules have not applied to domestic workers such as nannies and housekeepers. Following the introduction of a 0% starting rate for corporation tax in April 2002, there was potentially a significant tax saving if a domestic worker formed a company through which to provide their services. As a consequence, the personal services company regime is being extended to include domestic workers. The change takes effect for income tax purposes from 10 April 2003 but the NIC changes will not take effect until later in the year.


The change is not surprising given the publicity surrounding the benefits of nannies and housekeepers incorporating following last year’s Budget.

Homeworking costs

Employees who regularly work from home may receive a contribution from their employer towards the additional household costs incurred as a result. The employee would normally be charged to income tax (but not NICs) on any such payment. With effect from 6 April 2003, an income tax exemption will be introduced to cover such payments. Employers will be able to pay up to £2 per week without supporting evidence of the costs the employee has incurred. The exemption is still available for higher amounts but the employer must then provide supporting evidence that the payment is wholly in respect of additional household expenses.

Benefits in kind changes

A number of changes are proposed as follows:

  • the annual tax-free amount payable for long service awards will be increased from £20 to £50
  • the tax-free amount allowed for the cost of an annual employees’ party will be increased from £75 to £150 per head
  • the maximum value of a tax-free gift received by an employee from a third party will be increased from £150 to £250
  • the limit (currently six) on the number of cycle to work days on which meals can be provided to employees tax-free is removed.

The changes will take effect as soon as the necessary regulations are amended.