The Workplace ISA is now an essential workplace offering

24th June 2010

Workplace ISA is being considered by many employers keen to offer a savings alternative to those higher earners affected by the restrictions to pension tax relief.

Paul Bloomfield, Head of Tax comments  “Whilst the new government intends to simplify the restrictions, proposing a reduction in the annual allowance for pension contributions, the eventual limit of between £30,000 and £45,000 may still restrict some senior employees many of whom have become used to contributing a proportion of their variable pay to a pension”.

The corporate ISA provides choice and flexibility required. Linked to payroll, employees may contribute up to £850 per month from their net pay or make one off contributions. In effect the addition of corporate ISA offers the employee a combined savings limit made up of both pension and ISA.

However corporate ISA has a far wider application in the workplace. It has long acted as a useful mechanism for mitigating capital gains tax following the exercise of a SAYE share option scheme. In recent times its benefit has been somewhat diminished; the combination of a relatively low capital gains tax rate and the fact that many schemes have not been ‘in the money’ during the economic downturn have reduced the need for corporate ISA.

There are signs that capital gains are returning and this will need to be assessed.  The increased capital gains tax rate of 28 per cent is likely to be a consideration for a significant minority of employees and not just higher rate taxpayers given the requirement to add capital gains to income when assessing the charge to tax. Individuals who would otherwise be basic rate taxpayers may suffer capital gains tax at 28 per cent. The corporate ISA delivers the solution but only when it enables in specie transfers of shares from the share scheme administrator to the ISA provider.

Jonathan Watts – Lay, Director of WEALTH at work comments “Existing shareholdings can also be sheltered within the ISA wrapper. Bed and ISA is the mechanism by which existing shares are sold and reacquired within the ISA wrapper protecting any future capital growth from tax. Higher earners may also benefit by avoiding the additional tax that would otherwise be payable on dividends.”

The introduction of corporate ISA provides all employees with a valuable addition to their savings choices.

Please see the ‘Workplace ISA is now an essential workplace offering’ PDF attached.