The government is making good on its plan to limit the tax advantages of some benefits-in-kind when provided as part of a salary sacrifice arrangement. This will affect benefits, such as mobile phone contracts and workplace parking, but not those more traditional benefits, such as pensions and health care.
The government’s ‘Consultation on salary sacrifice for the provision of benefits-in-kind’ was released in August 2016. The consultation is set to explore the potential impact on employers and employees should the government decide to ‘change the way the benefits code applies when a benefit-in-kind is provided in conjunction with a salary sacrifice or flexible benefit scheme’.
So what is salary sacrifice?
A salary sacrifice arrangement is when an employer and employee agree to reduce the employee’s cash salary in return for a non-cash benefit. In the past these benefits included pension contributions, childcare vouchers and cycle-to-work schemes. However, more recently benefits have included cars, mobile phones and gym memberships, and it is this increase in benefits provided that has instigated a review by the government.
The reason these schemes are so popular is because they benefit employees and employers through reducing the amount of income tax and the employer and employers National Insurance Contributions (NICs) due on the employee remuneration. It is thought that this is unfair as not all employees are entitled to a benefit-in-kind through salary sacrifice and not all employers offer the benefit. The government therefore wish to level the playing field. The consultation also includes an example, which shows that some salary sacrifice schemes can cause the exchequer to lose out on £321 per basic rate payer and £391 per higher rate tax payer per annum.
Before looking at the changes in store, it is worth noting that the more traditional salary sacrifice schemes will be unaffected:
- Employer pension contributions
- Employer-provided pension advice
- Employer-supported childcare and provision of workplace nurseries
- Health related benefits, such as cycle-to-work
- Holiday trading schemes
However, for other salary sacrifice schemes the government is looking to remove the income tax and NICs benefits. This will be done by making the employer account for the value of the benefit-in-kind on their P11d or through their PAYE, which will mean income tax and Class 1A NICs will be charged on the benefit-in-kind. BiKs currently offered on top of salary will not be affected by the proposed changes.
Despite these changes the consultation makes it clear that it ‘does not prevent employers from providing benefits-in-kind to their employees through salary sacrifice, but it will remove the tax and NICs advantages that come from doing so’.
Salary sacrifices are a great way to incentivise and reward employees. The core schemes will remain unaffected, but it is important that you are aware of your tax liability should you deliver benefits that will now be taxable. If you would like to find out more about salary sacrifices and benefits-in-kind, please contact Lee Manning at firstname.lastname@example.org.
Approved changes will come into force from April 2017. The closing date of the consultation is 19 October 2016. If you would like to personally respond, please visit https://www.gov.uk/government/consultations/salary-sacrifice-for-the-provision-of-benefits-in-kind.