Big changes are coming to salary sacrifice - what do employers need to know? Dipa Mistry Kandola, LCP, examines
From this April the Government is intending to remove the income tax and NIC advantages that many benefits in kind delivered through salary sacrifice currently can enjoy, including when delivered through flexible benefit schemes.
Popular benefits that will lose their tax effectiveness include:
- employee health screening;
- company cars (unless they’re ultra-low emission vehicles)
- workplace parking;
- work-related training;
- mobile phones and other tech;
- gym membership;
- income protection schemes;
- critical illness insurance; and
- dental insurance.
By contrast, if you provide these and other benefits directly as benefits in kind, it appears that there will be no change, for now.
What actually is going to happen?
Although the above and other benefits can continue to be provided through salary sacrifice, tax legislation will be amended so that where a benefit in kind is provided through salary sacrifice and it is not specifically exempt employers will need to account to HMRC for income tax and Class 1A employer NICs at the greater of the amount of the salary sacrificed and the cash equivalent set out in statute.
Are some benefits protected?
Yes. Those benefits which will retain their tax effectiveness include:
- contributions to registered workplace pension schemes;
- contributions under a qualifying overseas pension scheme in respect of an employee who is a relevant migrant member of the pension scheme;
- group life assurance schemes, including the option to buy extra cover through flexible benefits;
- independent advice in respect of conversions and transfers of pension benefits where their nature will change from being a safeguarded benefit into a flexible pension benefit;
- employer-provided pension advice;
- employer-supported childcare and provision of workplace nurseries (though it should be noted tax free childcare will be phased in this year);
- cycles and safety equipment; and
- ultra-low emission cars.
In addition, there will be no change where salary is sacrificed in return for benefits that are not taxed and do not rely on a specific tax exemption, such as buying annual leave, which is often in the top three most selected through flexible benefits.
As employee benefit advisors it is interesting to see that the Government has taken such a stern stance on this matter. In the past not much attention was given to this area, and now the Government has decided to explicitly make it clear in legislation that only those benefits which promote their own polices such as supporting working families and the population with retirement planning are exempt.
Is there a transitional period for benefits that are not protected?
Yes. Salary sacrifice arrangements in place before 6 April 2017 will be protected until 5 April 2018 and arrangements for cars, living accommodation and school fees will be protected until 5 April 2021. However, if the salary sacrifice arrangement is “varied” or “renewed” after 5 April 2017, the protection comes to an immediate end. Quite what these terms mean will hopefully be spelt out by HMRC.
Let’s look at an example where dental insurance is offered through a flexible benefits scheme in conjunction with a salary sacrifice:
The current arrangement is due to come to an end in May 2017. The employee enters into a new salary sacrifice arrangement in respect of their dental insurance from 1 June 2017 as part of their annual flexible benefits selection window.
Arguably, the arrangement has been “renewed” so under the transitional provisions the tax advantages derived under a salary sacrifice would cease to be effective from June 2017.
If this is the case then the employee may no longer wish to pay for dental insurance through salary sacrifice.
What you should do now
Given this significant change in tax treatment, as part of flexible benefits scheme renewal planning, now is the time to ensure:
- relevant technical areas are clarified with specialist tax advice to clear any ambiguity;
- you are prepared for the phasing in of new Tax Free Childcare, and potentially having to manage this and the current childcare voucher scheme alongside each other;
- benefits are set up correctly within the various systems (eg payroll and any flexible benefits platform) in time for the changes as they are phased in;
- changes and options are clearly explained to employees now and/or part of any communication that happens on an annual basis (ie when the flexible benefit scheme election window is opened).
Find out more at: www.lcp.uk.com