Dramatic changes to salary sacrifice are on the way. Helen Swire explores the implications and looks at whether more reforms are likely
“This is my first Autumn Statement as chancellor. After careful consideration, and detailed discussion with the prime minister, I have decided that it will also be my last.” So announced Philip Hammond, to the short-lived delight of Labour backbenchers.
But Hammond wasn’t stepping down in November, rather he was retiring the Autumn Statement, in a manner of speaking. The last Spring Budget will be on 8 March this year: it will be replaced by an annual Budget announcement in the autumn, and – you guessed it – a Spring Statement.
This means, Hammond says, that any major fiscal changes will be announced in the autumn, well ahead of the new tax year, while in the spring the government will simply respond to the forecast from the Office for Budget Responsibility: and all of this with the intention of reducing complexities in the UK tax system.
But while the Autumn Statement still wasn’t an official ‘Budget announcement’, Hammond used it to reveal the much-anticipated changes to salary sacrifice and tax relief on benefits in kind.
Such schemes will, from April, pay the same taxes as everyone else – unless they are for ultra-low emission cars, pensions, childcare or cycle-to-work, which are excluded from the crackdown on tax relief. Beyond these exemptions, some long-term arrangements will be protected until 2021.
Salary sacrifice had been under consultation for so long that the announcement was far from shocking: nonetheless it has caused ripples throughout the world of employee benefits, with providers either breathing a sigh of relief or looking at how to evolve their propositions to meet the new requirements and remain relevant.
And, crucially, many are wondering whether this year’s final Spring Budget will pack a final tax punch.
The benefits in the safety net
As the government also used the Autumn Statement to announce – finally – that tax free childcare would finally be rolled out in 2017, it was hardly likely that childcare would fall foul of the reduction of tax relief.
Meanwhile, cycle-to-work providers have lauded the government protection of the benefit as a positive step to not only help employees make their pay go further, but to do so in a way that promotes the importance of good physical health.
It is also very popular: a recent survey from Edenred showed that almost half of employees (42%) would be interested in joining a cycle-to-work scheme if their employer offered one.
There was also a huge sigh of relief from the pensions industry.
“I was delighted that pensions didn’t change in this respect, because it felt like a deliberate decision to highlight that pensions are safeguarded with salary sacrifice,” says Hugh Nolan, president of the Society of Pension Professionals.
“It gives people confidence that the government is thinking carefully about pensions rather having a knee-jerk reaction to being short of cash, and is a positive commitment to pensions that we haven’t seen in recent years.”
For Nolan, safeguarding pensions from changes to salary sacrifice is less of a benefit to providers, who are used to adapting to changes to legislation, and more a significant plus for savers – not just for the tax relief.
“We’ve had change after change, and the biggest problem is for the savers who are investing in pensions but don’t feel that they have any continuity or security with what they’re saving into,” Nolan says. “The human aspect is the real cost, as the consumer never knows what they’re going to get because the rules are changing around them. That’s bound to put people off.”
The sticky issue of the employee car
Despite considerable confusion, it’s important to note that cars made the salary sacrifice safety net cut – to a degree.
Drivers of ultra-low emission cars will continue to enjoy the tax efficiencies that they have always had on these vehicles, with savings due to increase in 2020.
But providers also estimate that there will be less change than projected to many salary sacrifice car drivers.
“Employees in salary sacrifice car schemes already pay tax through the company car tax regime, which is unlike other salary sacrifice products,” argues Paul Gilshan, chief marketing officer at Tusker. “So changes to the treatment of salary sacrifice will not affect car drivers significantly, with cars remaining a great benefit for employees.”
Tusker’s research suggests that 46% of their scheme drivers will not be affected by government’s changes, either because they have opted for an ultra-low emission vehicle, or because the drivers are already paying more in benefit-in-kind tax than the salary being sacrificed.
With the government rules allowing companies to opt in to a car salary sacrifice scheme before March, providers are encouraging employers to consider if it will benefit their workforce – particularly as existing members will then be protected until 2021.
“Employers and staff have been quick to realise that the benefits of these car schemes are still there, even after the changes,” says Gilshan, adding “with manufacturers launching more ultra-low emission cars all the time, they are likely to gain even more momentum under the new rules, which will benefit everyone.”
Evolution and revolution
Despite the positivity from the car industry, employers will nonetheless have to review their propositions to ensure that a once extremely popular benefit across the board will remain relevant.
A major benefit of a car salary scheme historically has not been simply the savings but also the fact that it can appeal to every employee, regardless of age or lifestyle: and until now they have been able to pick a vehicle to match their needs. While there were greater savings on greener cars, employees were not restricted to them.
“For new salary sacrifice schemes, your employees will be required to choose very specific cars that might not meet their needs in order to get the tax break,” warns Michelle Howles, marketing director at Affinity Leasing.
“If a very green car suits you, then that’s fantastic – but there’s a lag in manufacturers making those cars. So you could end up signing your employees up to a scheme that won’t be able to benefit them greatly, because the cars that are available don’t necessarily suit their needs.”
As with other benefits that have only met some of the new salary sacrifice requirements or, in some cases, are no longer safeguarded, the employee benefits industry will have to evolve to meet needs.
In the case of cars, for example, lease companies providing schemes as voluntary benefits are promoting alternatives.
“One size doesn’t fit all when it comes to vehicles: and as an HR director you are responsible for keeping everybody happy,” says Howles. “If you’re looking to attract and retain, to be able to an offer a benefit that works for everyone as a voluntary benefit will give the breadth of your employees a bigger choice.”
Evolution of propositions and benefit choice is not restricted to employee car benefits: as employers lose tax and National Insurance savings on some benefits they will look to make savings through others.
“A lot of the large corporates have always funded their technology and communications through their NI savings,” says Stephen Hackett, director of employer services at Broadstone. “People will start to look at costs as those savings are taken away, and they will have to weigh up the value between the cost of technology and the value they’re getting from it. That will be the next big consideration for HR managers.”
But, he adds, it will also promote innovation, and he hopes to see more choice in areas such as healthcare.
PMI and group risk
“There are the two ‘extremes’ of private medical insurance and cash plans, but there has to be a range of modules in the middle that appeals to all the age ranges, depending on risks and budgets,” Hackett says. “Providers will have to innovate and start to look at demographics far more and build their products accordingly.”
Indeed, the health insurance industry expressed disappointment that Hammond failed to announce group risk benefits as one of the exceptions to remain under salary sacrifice – but spokespeople have reinforced the message that it is a benefit that can help employers make significant savings and keep people in work.
Speaking about group risk, GRiD spokeswoman Katharine Moxham says: “These benefits reduce the burden on the state and provide value to employers and employees, as well as helping the Department for Work & Pensions’ goals of supporting people back to work.
“So it was disappointing that they weren’t exempted, and it’s difficult to see why protecting income wouldn’t be a priority for government and why they wouldn’t want to encourage greater financial resilience.
“Nonetheless, group risk benefits still give fantastic value, and employers who make use of the extra support services really will optimise their budget and get more from their spend.”
Despite the new measures being announced in parliament after a long consultation, experts warn against employers breathing a sigh of relief just yet. The government could potentially save around £15bn if pensions are withdrawn from salary sacrifice: and with the uncertainties of Brexit and an unstable pound, the exchequer may be looking for more sources of saving.
“The government might start to think seriously about removing pensions as a salary sacrifice benefit, and many employers haven’t really considered what they’d do if that happened,” says Broadstone’s Hackett. “They need to start thinking about if they are prepared to pay for technology as an engagement and comms tool, rather than getting it ‘free’ through NI savings.”
After the past few years of pension shocks in Budget announcements, the industry is reluctant to rule out the possibility of further changes: but there is at least the hope that the present situation will remain the status quo for a while.
“I get the sense from government that they’re taking their time to think about pensions and get it right: they know there’s been a lot of tinkering and it’s not helpful,” says PMI’s Nolan.
“When they make changes it could well be sweeping and radical – but it won’t happen immediately, and hopefully there will be a period of stability while they consult on those changes and make sure they get them right.”