Julian Sansum, senior manager at top accountancy Deloitte & Touche, looks at the effects of the national insurance changes due in April next year 'Next year's national insurance increases, from April 2003, mean extra costs for employees and employers. But how much?

Earlier this year the Chancellor of the Exchequer 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).

This, coupled with the increase in the car scale benefit (carbon dioxide based company car tax) rate for 2003/04 and 2004/05, means increased costs for both drivers and the employer. Table 1 looks at a typical employee driving a 1.8LX Mondeo.

The scale charge calculator increases the percentage of the list price taxed from 19% this year to 21% next year and 23% in 2004/05.

This means that the Mondeo driver will see his or her tax bill increase 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 national insurance charged to the employer.

However, as the employer must pay national insurance on the car scale charge, the increase to the car benefit charge is compounded by the extra 1% increase in the rate. What happens to the private fuel charges?

For the 2003/04 tax year, tax on private fuel will be calculated as the car scale benefit percentage multiplied by a notional price of £14,400.

The employer's 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% over 2002/03.

Increasing the national insurance rate by 1%, when coupled with the new fuel benefit charge, will increase the employer's costs by 15% in this example.

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.

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.'

Table 1: Company car example
Ford Mondeo 1.8 16v 4-door saloon LX
List price: £14,644
CO2 emissions (g/km): 185
	2002/03	2003/04	2004/05
Car scale benefit - % of list price taxed:	19%	21%	23%
Income tax (higher rate):	£1,113	£1,230	£1,347
Employer's national insurance rate:	11.8%	12.8%	12.8%
Employer's cost increase from 2002/03		20%	31%
Assume higher rate taxpayer, not contracted-out of SERPS

Table 2: Private fuel example
Ford Mondeo 1.8 16v 4-door saloon LX
	2002/03	2003/04
Fuel benefit basis cost:		£14,400
CO2 emisions (g/km):		185
Car scale benefit:		21%
Fuel scale charge:	£2,850	£3,024
Income tax (higher rate):	£1,140	£1,140
Increase		6%
Employer's national insurance rate:	11.8%	12.8%
Employer's national insurance cost:	£336	£387
Cost increase from 2002/03:		15%
Assume higher rate taxpayer, not contracted-out of SERPS

Table 3: cash example
	2002/03
Current cash option:	£5,000
Employee's cash in hand:	£3,000
Gross cost to employer including NIC:	£5,590
	2003/04
Cash option:	£5,000
Employees cash in hand:	£2,950
Gross cost to employer including NIC	£5,640
Additional cost to employer:	£50
Assume higher rate taxpayer earning above the upper earnings limit for national insurance and contracted-out of SERPS