Danby Bloch: Advisers can help clients beat new salary sacrifice rules

Danby Bloch white

Budgets nowadays are mostly about things that will happen at least a year out. So sometimes the parliamentary razzmatazz diverts us from the train crashes about to hit us. Like the new salary sacrifice rules that will kick in in April.

When the salary sacrifice rules were first announced last year, it was hoped the changes would not affect employers’ group life policies, relevant life policies or group income protection. Now we know this hope was too optimistic; the new rules do apply. So what will this mean?

Benefits in kind will be valued at the higher of the cash forgone by an employee or by their current taxable value.

For example, Bill is an employee of ABC plc, which has a group life cover scheme providing him with £100,000 of life cover. He has recently added to his family and would like to increase the cover to £250,000. Under the current pre-6 April rules, he can sacrifice some of his salary to meet the extra premium, say, £200 a year.

He is a higher rate taxpayer, so his salary sacrifice costs him £200 less £80 (40 per cent income tax) and less £4 (2 per cent employee National Insurance contributions). His employer also saves some NICs.

Under the new rules, he will pay the full tax and NICs on the benefit. That will make a good deal of flexible remuneration planning more or less redundant.

Fortunately, there are still some benefits that will retain the salary sacrifice privileges. They just will not be protection benefits. The following will not be affected by the new rule:

  • Employer-provided pension saving
  • Employer-provided pensions advice
  • Childcare vouchers
  • Workplace nurseries
  • Directly contracted childcare
  • Cycle to work schemes
  • Ultra low-energy vehicles emitting 75g CO2/km or less.

Any current contracts will remain under the pre-2017 rules until the contract ends or is modified, changed or renewed, or by April 2018 at the latest. However, the April 2018 deadline will be extended to April 2021 for cars, accommodation and school fees.

The legislation for the new salary sacrifice rules will be introduced in the Finance Bill 2017, which means there is still time for the insurance industry to do some lobbying. But let’s assume the lobbying does not work or does not happen.

What can advisers and employee benefit consultants do about it for clients? The key advice for employers should be to make sure their basic life and income protection schemes are adequate for most purposes, as salary sacrifice will not then be so necessary. After all, these schemes are extraordinarily good value. For individual employee clients, it is important to get their remuneration packages right before they need to use salary sacrifice.

Top tips on dividend and NIC changes

And so what of the Budget? The biggest items of news for most advisers were the cut in the dividend allowance and the increase in NICs for the self-employed.

The cut in the dividend allowance from £5,000 to £2,000 in 2018/19 was sneaky. People of a malevolent disposition might wonder whether this was the gameplan all along. The argument in the Treasury might have gone along the following lines:

“OK, let’s increase the tax on dividends and get rid of this complicated tax credit arrangement. And we’ll soften the blow by introducing a special tax-free allowance for the first £5,000 of dividend income. Only a few relatively rich people will be worse off.

“Then after a few years have gone by let’s bring down the allowance by quite a lot, long after most people have forgotten about the old system for taxing dividends.”

Or perhaps it is just incoherent policy-making, as the Institute for Fiscal Studies has suggested.

So who will be affected by the Chancellor’s reduction to the dividend allowance? At £5,000, the allowance covers dividends from a portfolio of over £140,000 with a current average yield for the UK market of about 3.5 per cent. An allowance of £2,000 only covers dividends from a £60,000 portfolio of 3.5 per cent yielding equities.

With this in mind, it is great the Isa allowance has gone up to £20,000 a year. Until now, many investors might not have bothered with Isas, especially if their dividends and likely capital gains were reasonably modest. The £5,000 dividend allowance was more than enough for most taxpayers and the £11,300 CGT annual exempt amount was perfectly adequate to keep most of them out of tax on their gains – as long as they were not allowed to accumulate without cashing them from time to time.

But things change and clients who have regularly invested the maximum they could in Isas year after year should be really pleased with the advice they have received. Some investors have built up millions in their Isa tax havens.

And what about the shock the self-employed received in the Budget? Their Class 4 NIC rate would have risen by 1 per cent in 2018/19 and another 1 per cent in the following year, bringing the rate to 11 per cent. Compared with the combined NIC charge for employees, the deal for the self-employed would have still been extraordinarily favourable – even after the increases.

Danby Bloch is chairman at Helm Godfrey