A holiday pay scheme set up to encourage construction workers to take time off has been abolished.
On October 9, Alaistair Darling's pre budget review provided clarity around the future of holiday pay schemes. After 12 months of speculation, the review confirmed the withdrawal of the long standing exemption for holiday pay from national insurance contributions (NIC).

While construction companies have five years to adjust to the changes, the changes for employees not engaged in this sector will take effect at the end of this month.

Under previous arrangements employers could set up a scheme enabling them to pay staff their holiday entitlement free of national insurance. The scheme was initially introduced to allow employees in the construction industry (who regularly moved from job to job) to build up a fund on which they could draw to take time off.

However, employers from other sectors that have recently taken advantage of this exemption will be under pressure to review their arrangements immediately.

Gary Hull, tax director, PricewaterhouseCoopers LLP, said:
'We are disappointed to see that the construction industry will not be exempt from these changes as it has been operating this system effectively for many years.'

A number of large employers that recently introduced schemes are now faced with the immediate withdrawal of the exemption. If outside the transitional arrangements, employers operating effective schemes will have until October 29 to make payments for periods of holiday without having to account for NIC.

This gives employers very little time to establish the appropriate period of holiday entitlement to which such a payment can be made free from NIC, with the added complications of effective employee communications being undertaken at the same time. Firms are now faced with unravelling the arrangements and closing down redundant schemes.