Government limits tax-efficient salary sacrifice arrangements

Philip Hammond 700px

Autumn Statement 2016: From April 2017, the government will significantly limit the range of benefits that attract tax and employer national insurance (NI) advantages when offered through a salary sacrifice arrangement.

Pensions and pensions advice, childcare, bikes-for-work schemes, and ultra-low emission vehicles (ULEVs) will be exempt from the changes.

Arrangements in place before April 2017 will be protected until April 2018.

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Arrangements for cars, accommodation, and school fees will be protected until 2021.

Chancellor Philip Hammond (pictured) said: “The government will take action now to reduce the difference between the treatment of cash earnings and benefits.

“The majority of employees pay tax on a cash salary. But some are able to sacrifice salary and pay much lower tax on benefits in kind. This is unfair, so from April 2017 employers and employees who use these schemes will pay the same taxes as everyone else.

“Following consultation with stakeholders, ultra-low emission cars, pensions saving, childcare and the [bikes-for-work] scheme will be excluded from this change. And certain long-term arrangements will be protected until April 2021.”

The announcement follows a government consultation, which ran from 10 August to 19 October 2016. This sought views on the potential impact on employers and staff should the government change the way the benefits code applies when a benefit in kind (BIK) is provided in conjunction with a salary sacrifice or flexible benefits scheme. It proposed changing tax legislation so that BIKs offered through salary sacrifice or flexible benefits would be chargeable to income tax and Class 1A employer NICs.

Mark Groom, tax partner at Deloitte, said: “From April 2017, tax bills on many benefits in kind will increase, in some cases significantly. The new rules will apply whenever a benefit is provided in conjunction with salary sacrifice. It will come as a surprise to many that the new rules will also apply in cases where an employer offers employees a choice between a benefit and a cash alternative, if the benefit is not wanted.

“One of the reasons for the change was the perceived tax cost of salary sacrifice schemes; however, the measures are only anticipated to raise £85 million in 2017/18 and £235 million per annum thereafter.”

Matt Dyer, managing director at LeasePlan UK, said: “The Chancellor’s decision to target cars gained through salary sacrifice is both destructive and disappointing for the motoring industry. We must also remember that going forward, HMRC has been clear that it will make no distinction between salary sacrifice and the practice of offering a cash allowance in lieu of a company car meaning this could affect up to 600 thousand drivers. The vehicle rental and leasing industry contributes £24.9 billion a year to the UK economy, and company car leasing schemes are a large part of that success story, with over half of new car sales alone last year going into fleets.

“We should also stress that these drivers are the hard working essential car users such as tradesman and nurses, most of whom will be the JAMs [just about managing] that the government is so keen to provide for.

“While we should take some solace from the fact that ultra-low emission vehicles will remain unaffected and any existing arrangements will be protected until 2021, this is complicated by the fact that a new definition has been given for ‘ultra low’ and we will have to wait for the Finance Bill on the 5 December to see exactly what this means.

“It is also astonishing that April 2017 has remained as the implementation date, giving providers and employers comparatively no time at all to ensure they can comply with the new rules effectively, leading to unwelcome complexity for very little gain.”

Katharine Moxham, spokesperson for industry body Group Risk Development (Grid), said: “We are obviously disappointed that government has not seen fit to give an exemption for group life or income protection where employees are able to increase their coverage through salary sacrifice. The amounts involved are small and the resulting change will simply add complexity for providers and scheme members. It will add a further burden on businesses which might otherwise have included a facility to allow their employees to build on a basic level of employer-provided cover.”

Jeff Fox, principal at Aon Employee Benefits, said: “Salary sacrifice remains, but a major step has been taken to move against a concept that government regards unfair and costly to the exchequer. But as the government tries to rip up the roots here, it may find it is dealing with knot weed.

“This will be a major headache for employers. Operationally, the proposal will cause challenges due to the short-timescales for communications and payroll. It will also make it harder for businesses to offer a compelling and competitive benefit package. Organisations which do rely upon salary sacrifice to fund general benefits will be heartened that pensions, childcare, ultra-low emission cars and bikes are out of scope.

“Employees who have opted into the affected salary sacrifice schemes in good faith will have found themselves the wrong side of the taxation fence today. But it is good to hear that the government has listened to representations and introduced a longer transitional phase for those already participating in salary sacrifice.”

Dr Nick Summerton, GP and medical director at Bluecrest Wellness, said: “Fundamentally, anything that limits the offer or take-up of health screening among employees is a problem. In the context of limited and dwindling NHS screening offerings, employers and their people need good-quality health screens.

“At the same time, pressure on health screening providers and greater attention to the value they provide to organisations has to be welcomed. Traditional health screens can be very expensive, and this is the wake-up call needed for HR and reward teams to look at what’s important, what’s value for money for employees and what’s not.”

James Malia, director of employee benefits at Sodexo Benefits and Rewards Services, said: “The industry now needs to develop innovative ways for employers to deliver attractive and innovative benefits to their workforce through an alternative mechanism. Even without tax efficiencies, many of the benefits in question can still be of great value to employees, and this should not be overlooked. Providers must work with businesses to establish a sustainable method of funding these important schemes, which improve the day-to-day lives of employees.”

Nick Willis, director and solicitor at PricewaterhouseCoopers, said: “Salary sacrifice arrangements form part of employees’ terms and conditions. Employers will, therefore, need to look urgently at these arrangements and the contractual promises they have made to assess whether, and how, benefits will be continued post-abolition of salary sacrifice.

“Difficult issues will arise on who will bear any increased cost in benefit provision and whether an employer has the flexibility to cease providing a benefit that has become prohibitively expensive.”