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Danby Bloch: The end of salary sacrifice as we know it

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

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Comments

There are 7 comments at the moment, we would lover to hear your opinion too.

  1. I am very obviously missing something here. I’m afraid I must be a bit slow as I cannot understand how this would affect a smaller firm.

    The employee comes in to meet the boss at review time. He already has a pension with the firm (not AE). The boss says OK you are entitled to a £3,000 rise this year. How would you like to take it? The employee says he will take 50% as pension and the balance as salary. The boss says, OK and I will enhance the pension to the extent of the firm’s saving in NI.
    So the employee gets a £1,500 rise and a further £1,700 in pension. Please can someone tell me how HMRC will know that salary has been sacrificed if the parties to the deal keep schtum and the firm merely says that they have offered a rise plus an enhancement to the pension as a part of the employee benefit package?

    • Well, it doesn’t apply to pensions so that’s fine anyway in your example.

      If both parties ‘keep schtum’ as you put it then of course HMRC wouldn’t know in the same way they wouldn’t know if you paid the employee in cash in a brown paper bag and both parties ‘keep schtum’. Likewise, if you steal a loaf of bread or de-fraud your client and don’t get caught then you’re home and dry too…

      • Thanks for that. Most helpful. And of course I know you fully realise that the higher the Tax impost the more it encourages unorthodox(!?) measures. As we have seen, the more benign the tax the larger the tax trawl. It is a lesson that rarely seems to be learnt by No.11.

  2. Reading this and other articles on the same issue, I just don’t see that it will cause the scale of problems that are being touted by Danby and the other authors.
    The exemptions cover the major benefits that tend to form flexible remuneration arrangements.
    With regard to life assurance and income protection, these are mostly provided as a benefit that is divorced from some flexible arrangement; it is generally only the very large employers who can afford the software (or pay and use the EB Consultant’s software solution) that have moved to adopting a core level of benefit in these areas with the option to sacrifice or purchase additional benefits who will be affected.

  3. Matthew Gregson 4th April 2017 at 5:46 pm

    Thanks for the article – good and technically correct, with the exception of your sizing of the problem. Our estimate (I’m at Thomsons Online Benefits), from our client base is that clients and their employees will retain approx. 95% of their current tax and NIC savings derived from salary sacrifice arrangements, as they are gained from the exempt benefits listed above.

    The remaining benefits, such as group protection and health assessments, will become taxable benefits, if they remain under sal sac arrangements. Although tax will now be paid on them, NIC is still saved by the employee and the NIC payable by the employer is the same as on the salary equivalent, so the net effect is neutral for the employer. Yes, it will impact the desirability of the benefits and take-up may reduce, but you would hope that people were buying life cover in the workplace for more than just the tax incentive – their family, their security, their future.

    The shot across the bow raises a far more interesting point, in our view, which is whether these benefits remain intrinsically valuable, when you remove the tax advantage or whether we should now be seeking better alternatives – think of wellness apps instead of health assessments – 100th of the cost, yet a continuous measure of one’s state of health, with a little bit of engagement.

  4. The headline might have given a more apocalyptic impression of the outcome of these changes than I intended in the article. I think the changes are important but obviously don’t impact on pension etc – at least for now. But the effect on protection will be serious and anyone who is offered a choice between say a company car or a pay rise will be hit.
    Harry Katz suggests that ther might be some evasion – that was what I inferred in any case. Of course that is always a possibility. But what was once legal will shortly be unlawful. Consultants won’t be able to promote optional remuneration in the same way as in the past. And it isn’t worth it for most employers to get involved in shennagens. What’s more HMRC may well look at inconsistencies in remuneration if they are sufficiently glaring.

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