There has been much talk over the last year about the government’s contempt for salary sacrifice schemes and the actual cost to the Exchequer, and on 10th August 2016 HMRC launched its consultation on salary sacrifice, giving the clearest indication yet of its intentions going forward.
The consultation is set to be open until 19th October 2016 with details of the responses, and decisions made in light of those responses, due to be published in the Autumn Statement 2016. It is the government’s intention that the legislation would then take effect from 6th April 2017.
The consultation sets out the proposal to remove the tax and national insurance (“NI”) benefit when an employee gives up a proportion of their gross salary in exchange for discounted cars, electronic goods and insurances.
The consultation paper outlines the government’s concerns about the growth of salary sacrifice arrangements and their fairness in the tax system stating that “the way in which benefits are provided has also evolved, with a growing market for flexible benefit packages, often combined with salary sacrifice arrangements. This growth represents an increasing cost to the Exchequer and creates an uneven playing field between employees and employers who use such arrangements and benefit from the tax advantages, and those that don’t.”
However, they have confirmed that the following schemes will be unaffected by the review:
- Employer pension contributions
- Employer-provided pension advice
- Employer-supported childcare (childcare vouchers and workplace nurseries)
- Cycle to Work
- Holiday trading
Other salary sacrifice schemes would be treated as follows:
Where the benefit is currently tax free, a value equivalent to the salary sacrifice would need to be added to the P11D return (or taxed through payroll). This would remove any tax saving for the employee and the employer would pay National Insurance. Examples of benefits that would be affected include Health Screening, Car Parking, Mobile Phones and non-core Life Assurance.
Where the benefit is not tax free but the salary sacrifice has previously been tax-advantageous due to a reduced benefit in kind figure, a value equivalent to the salary sacrifice (as opposed to the benefit in kind value) would be added to the P11D return (or taxed through payroll). This negates any tax saving for the employee and eliminates any National Insurance saving for the employer. Examples of benefits affected in this way include salary sacrifice cars and technology schemes.
The legislation would apply to both salary sacrifice schemes and to flexible benefit propositions, where deductions can be made from benefit allowances.
Importantly, salary sacrifice can continue to be used for all schemes, and employees will still benefit from Employee National Insurance savings (12% or 2%, depending on earnings).
If you are worried about how these changes may impact your current salary sacrifice schemes or want to provide some feedback for us to use in our consultation response, please get in touch with Charlotte Stewart (firstname.lastname@example.org) in our Integrated Employment Solutions team.