The Government has just published draft clauses in the Finance Bill setting out how the new salary sacrifice rules will work. I offer no apologies for returning to this controversial new tax law, which will more or less annihilate flexible remuneration, cost employees a great deal of tax and their employers a hefty increase in National Insurance contributions.
In fact, the draft legislation does not even refer to “salary sacrifice”. The clauses talk about “optional remuneration arrangements”, which tells you the new rules go beyond what most people would regard as salary sacrifice: giving up something you already have.
The Bill identifies two types of optional remuneration arrangement:
Type A arrangements occur when an employee gives up taxable earnings (or a future right to earnings) in exchange for a benefit. An example of what I think this means: Fred says he will give up £1,000 a year of the salary increase he has already been awarded in order to have a normal company car, usually valued at £700 a year. This would value the benefit at the higher amount of the £1,000 given up.
Type B arrangements are when an employee is offered the alternative of a benefit or a cash allowance in lieu of the benefit. Where the employee chooses the benefit, it will be valued at the level of what the cash allowance would have been. An example of what I think this means: XYZ employer offers Madge the choice between an extra £500 a year or a mobile telephone. The mobile would normally be tax free but the extra salary she has decided not to take of £500 would become the taxable value of the benefit.
So, if employers were thinking of offering an employee the alternative of a future pay rise or the equivalent amount in, say, relevant life assurance policy premiums, it looks as if such a deal might well be caught under type A or more probably under type B.
The new rules will take effect from 6 April, although there will be some special transitional provisions and a brief list of exempt benefits in kind. From the start of the 2017/18 tax year, benefits in kind provided under optional remuneration arrangements will generally be subject to income tax and Class 1A NICs. This will be on the greater of the “cash equivalent” (under the existing benefits in kind rules) or the amount of pay forgone by the employee.
Income tax will be payable at whatever rate (or rates) applies to the employee. The employer will pay 13.8 per cent NICs on the value of the benefits in kind.
The exempt benefits in kind will be:
- Pension saving (including related pension advice)
- Tax exempt childcare
- Cycle-to-work schemes
- Purchase of annual leave
- Ultra-low emission company cars (with CO2 emissions of no more than 75g/km).
Under the new rules, the beneficial income tax and NIC treatment of benefits in kind such as mobile phones, most company cars (those with CO2 emissions above the aforementioned limit), workplace car parking and discounts on an employer’s own goods will no longer apply when provided in the context of an optional remuneration arrangement.
Also missing from the list of exemptions – and therefore taxable in the same way – are relevant life policies, excepted group life policies, and individual and group income protection policies.
The draft legislation provides some helpful clarification in various important areas. For example, if an employer and employee have entered into an agreement before the deadline of 6 April, the income tax and NIC treatment will be protected under special transitional arrangements for a specified period. The length of this period will depend on the type of benefit in kind provided under the optional remuneration arrangements.
For company cars with CO2 emissions of more than 75g/km, free or low cost accommodation or school fees, the transitional period will last until the earlier of 6 April 2021 and the date when the optional remuneration arrangement is either renegotiated, revised or reviewed.
For the other benefits in kind agreed before 6 April, the maximum transitional period is just one year, ending on 6 April 2018. It could finish earlier if the optional remuneration arrangement is renegotiated, revised or reviewed before then.
The transitional rules will continue to apply and the advantages not lost if it turns out to be necessary to make later changes to pre-6 April arrangements because of accidental damage, replacement or reasons beyond the control of either party.
Likewise, they will not be lost if the changes to the arrangement are caused by statutory sick pay, statutory maternity/paternity/adoption pay or shared parental pay.
Employers will have to review their contractual position with respect to their various existing employee benefit packages and flexible benefits arrangements, as well as how they are communicated to staff.
So far, it would seem the Association of British Insurers has not been successful in persuading the Government that life assurance and income protection are more important than bicycles. We can but live in hope.
Danby Bloch is chairman at Helm Godfrey