HM Revenue & Customs lobbed a small grenade into the world of tax-efficient remuneration in a quiet week in August, while most HR managers, employee benefit consultants and many other employees were sunning themselves on beaches.
The HMRC proposal is to take away the tax and national insurance advantages of many salary sacrifice schemes from 6 April, 2017 – but not pension saving, employer supported childcare and cycle-to-work benefits.
The idea was mooted in the 2015 Autumn Statement and in this year’s Budget. But now we can see the proposals in their grisly detail.
Many employers provide their employees with benefits in kind on top of their ordinary salary. So lots of employees and directors get their company car and mobile phone as a matter of course – either because they need them for their work or just as part of their remuneration package. But some employers offer more flexible remuneration – “flex”, as it is known in the trade – and employees can choose to reduce their cash pay in exchange for some kind of non-cash benefit in kind.
For instance, if an employer provides a director or employee with a mobile phone for private use, the benefit is exempt from tax and national insurance contributions. So if it is provided in addition to salary there is no extra tax or NICs liability.
It is the same where the employer has provided the phone under a salary sacrifice agreement: both the employer and employee save tax and NICs compared with the employee buying the same phone from their take-home pay.
The table above shows the amount of tax and NICs saved on a contract of £700 purchased through salary sacrifice by an employee in each income tax band, by an employer, and the overall cost to the Exchequer, according to HMRC.
HMRC has several gripes about this. First there is the cost to the Exchequer at a time when the Government is desperately searching for ways to reduce the public sector deficit.
Then there is the fact that the benefits are unevenly spread. Leaving aside the differences in the levels of benefit between basic and higher or additional rate taxpayers, the fact is many employers do not offer these salary sacrifice schemes.
HMRC also points out that the people at the bottom of the wages scale – those on or near the minimum wage – have no choice about the level of their contracted cash pay; it cannot be cut below the level of the minimum wage in exchange for benefits in kind.
In practice, it seems that by far the most salary sacrifice relates to the three areas that the Government is not proposing to attack, because it wants to encourage them. These are salary sacrifice for employer pension contributions; employer-supported childcare; and providing bicycles and biking safety equipment.
The Government also proposes to exclude from the new rules employer-provided pension advice based on the Financial Advice Market Review recommendations. Payroll-giving to charities will not be affected either. And changes are planned to salary sacrifice in return for intangible benefits such as extra annual leave.
The big areas for growth have included private medical insurance and extra leave, cars, health screening and the provision of assets such as mobile phones, TVs, computers and white goods.
The Government’s strategy is to let employers provide benefits in kind to employees through salary sacrifice but to take away the tax advantages and charge NICs under class 1A on the employer.
The general rule currently is that a benefit in kind is determined by the cash equivalent of the benefit. That is usually the cost to the employer providing the benefit or the value that is determined by special rules – such as a company car.
The proposal for next tax year is that where an employee is provided with a benefit in kind that is not exempt, the cash equivalent on which the tax and NICs will be based will be the greater of the value under the general rule (which might be nil in some cases) or the actual amount of salary sacrificed by the employee.
For example, an employee sacrifices £600 a year in return for workplace parking, which is exempt under s237 of the Income Tax (Earnings and Pensions) Act. From 6 April 2017 the exemption will no longer apply for a salary sacrifice arrangement and the benefit will be subject to income tax and class 1A NICs on the £600-a-year sacrifice.
Employers will to report salary sacrifice arrangements to HMRC in the P11D or voluntary payrolling.
As usual, the devil will be in the detail. We have yet to see the draft clauses defining salary sacrifice and how it might relate to pay increases not yet awarded – maybe sacrificing future pay increases will be OK. They do not mention life assurance cover through relevant life policies or income protection insurance.
In the meantime the closing date for comments is 19 October. It might be worth suggesting that life assurance, income protection and perhaps even critical illness cover be added to the list of benefits excluded from the new rules.
Danby Bloch is chairman at Helm Godfrey