In recent years the taxman has identified a growth in salary sacrifice schemes. Under these schemes, employees and employers agree to reduce the former’s entitlement to salary in exchange for a non-cash benefit in kind. For tax-free benefits such as pension contributions, mobile phones and childcare, there is currently a clear tax saving in making these arrangements.
Predictably perhaps, HMRC has been thinking how the tax benefits available through these schemes could be limited, and new rules are going to be brought in from April 2017.
Except where benefits are specifically excluded, the new rules will see tax and National Insurance Contributions being charged on the higher of the taxable value of the benefit, and on the amount of cash given up under the salary sacrifice arrangements. The provision of a mobile phone, for example, will be taxed on the amount of cash given up in exchange for it.
In a first stab at the problem earlier this year, childcare benefits, pension contributions, employer-provided pension advice, and equipment provided under cycle to work schemes were going to be excluded from the new rules.
The Government has recently announced that one further benefit is to be excluded from the new rules: company cars with ultra-low emissions. This new exclusion will be useful to some employees. However, the emissions threshold is very low (75g/km) and many company cars will not fall within this exemption. A Toyota Prius could qualify, for example, but a Fiat 500 would not.
The Government has acknowledged that in some cases employees will be locked into salary sacrifice arrangements. Consequently there are to be transitional provisions.
These provisions will apply where agreements are in place by 6 April 2017. They mean that the existing tax rules will apply until 6 April 2018 in most cases and until 6 April 2021 in the case of cars, accommodation, and school fees. (As an aside, it should be noted that the Government is going to start considering the way in which benefits in kind are valued for tax purposes. This could affect the tax treatment of employer-provided accommodation or school fees benefits, even under the transitional rules.)
The new salary sacrifice rules are being introduced in part to tackle what the Government sees as an uneven playing field between employees and employers who use salary sacrifice arrangements and those who don’t. While they will tackle one element of any perceived inequality, there will still be scope under the new rules for disparity between different employees on identical packages.
Firstly, during the period in which the transitional provisions apply, there will be disparity between employees who entered into salary sacrifice arrangements prior to 6 April 2017 and those that did so afterwards.
Secondly and perhaps more significantly, existing employees who enter into salary sacrifice arrangements may well be treated differently to newly recruited employees who are automatically provided with benefits from the outset. An employee on £50,000 who chooses to sacrifice £1,000 to receive a benefit that would ordinarily be tax free will remain taxable on the full £50,000. A new employee who is employed on a package that comprises a salary of £49,000 and a tax-free benefit will only be taxed on £49,000.
It is thought that, at least initially, many employers will want to continue to offer salary sacrifice arrangements, or to allow employees to renew existing arrangements, despite the fact that in many cases these will no longer be as tax efficient as they were previously. In time the lack of any NIC incentive on the part of employers could well see a decline in arrangements that allow employees to receive benefits such as mobile phones, health screenings, or training.
Employers will need to consider the changes and decide on their response. Overall, though, there is likely to be a reduction in employee choice.
Andrew Constable, Partner, Kingston Smith
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