The Autumn statement is here. Philip Hammond, the new Chancellor has set out his stall in preparation for the “sharp challenges ahead of Brexit”. What bright and shiny tax efficient flexible benefits can employers continue to offer employees through salary sacrifice arrangements?
What is a salary sacrifice arrangement?
A salary or contractual bonus sacrifice arrangement (salary sacrifice) involves an employee giving up part of his entitlement to salary or bonus, which is subject to income tax and national insurance contributions (NICs), in exchange for a new or enhanced non-cash benefit, which benefits from a full or partial exemption from tax or NICs (or both).
What kind of benefits have the arrangements been used for?
Familiar examples include the cycle to work scheme in which a business is allowed to loan cycles and cyclist’s safety equipment to employees as a tax and NICs free benefit. This has enabled employees to save tax and NICs on the salary sacrificed and the business has been able to save NICs. Employer supported childcare such as childcare vouchers provided by the employer for qualifying childcare and directly-contracted or employer contracted childcare also benefit from the exemption from tax and NICs. Salary sacrifice arrangements have also been used to increase employer pension contributions by substituting this entitlement for an entitlement to an amount of salary. This has the effect of reducing gross earnings, which reduces the amount of both employer and employee NICs payable since there are no employer NICs on employer pension contributions.
Significant growth in use of salary sacrifice arrangements has given the government cause for concern about the increasing cost to the exchequer and misuse of salary sacrifice for ‘luxury’ perks. Benefits on offer have expanded to include brand new company cars (inclusive of road tax, repairs, tyres, servicing and roadside assistance), the choice of the latest technology ranging from smart mobile phone contracts, computers, laptops and tablets, a wide definition of work related training, which even included Outward Bound and Raleigh International expeditions and healthcare, parking, gym memberships and white goods for example. The Treasury estimates that one million employees benefit from such schemes and that they have increased by 30% since 2009/10. Following consultation in August this year, the government announced its intention to limit the benefits that attract tax and NICs advantages when provided as part of a salary sacrifice arrangement.
What does the autumn statement change?
The Chancellor has announced that salary sacrifice for enhanced employer pension contributions, childcare benefits and health-related benefits, such as the cycle to work scheme, would continue to benefit from tax and NICs relief if provided through salary sacrifice. However, from 1 April 2017 other benefits will not be protected from tax and NIC relief and employers and employees using "salary sacrifice" schemes will pay the same tax as anyone else. The greater of either the salary sacrifice or the employee benefit (BIK P11D) value, if any, will be subject to tax and NICs, which effectively wipes out any salary sacrifice savings that can be made by employers and employees alike. Any arrangements in place before 1 April 2017 will be honoured and protected for 1 year and any salary sacrifice arrangements offering cars, accommodation or private school fees in place before 1 April 2017 will be protected for four years until 2021. Interestingly, the chancellor has decided to start protecting ultra low emission cars offered through salary sacrifice with less than 75g/km emission from tax and NICs. The Treasury estimates that of the £200m per year that it expects to save, more than half will come from higher rate earners. Whether or not you consider this move to be a raid on employee benefits or a smart move to make the economy watertight in preparation for the sharp challenges ahead of Brexit, those bright and shiny employee benefits are going to cost us more.
Confused? Want some advice? Then come and talk to our friendly employment law specialists. We can help you make sense of the changes and help you navigate a way forward.