The final nail in the coffin for salary sacrifice…well almost!

Fri 12 Aug 2016

In the Autumn Statement 2015 the government announced that it would be monitoring the use of salary sacrifice arrangements and at Budget 2016 said it was considering limiting the range of benefits that attract tax and National Insurance Contributions (NICs) savings.  So it’s no surprise that HMRC has issued a Consultation Document in which it outlines its proposed changes to salary sacrifice arrangements.

What’s the issue?

Currently, under a salary sacrifice arrangement an employee can be provided with benefits that save NICs for both the employee and employer; for tax-exempt benefits the employee saves Income Tax as well.  HMRC consider that not only is there a loss to the Exchequer with the increasing use of such arrangements, those employees who can’t participate in salary sacrifice arrangements because these would reduce their salary below the National Minimum or Living Wage, are disadvantaged and it deems this unfair.

What’s the proposal?

HMRC is proposing that certain benefits such as employer pension contributions, employer-supported childcare and cycles and related equipment which meet the cycle-to-work scheme conditions are protected from the proposals, whilst all other benefits provided via a salary sacrifice arrangement will lose their tax and NIC advantages.

Broadly, the proposal is to change the tax legislation so that when a benefit is provided through a salary sacrifice arrangement, it would now be chargeable to income tax and Class 1A employer National Insurance Contributions (NICs). This is, even if it is normally exempt from tax and Class 1A NICs, at the greater of:

•             the amount of salary sacrificed, and

•             the cash equivalent set out in statute (if any).

This will impact benefits such as workplace car parking, mobile phones and life insurance which can currently exempt from tax and NIC as well as benefits such as company cars.

In summary, the proposals do not prevent employers providing benefits via salary sacrifice, but those benefits which are not ‘protected’ will attract Income Tax and employer Class 1A NIC liabilities.  Tax-exempt benefits which are provided under a salary sacrifice arrangement will lose their tax-exempt status too!

What do you need to do now?

We will be responding to HMRC’s consultation document on behalf of our clients. We would like to hear your views on the salary sacrifice consultation – please take a few moments to fill out our survey. The consultation closes on 19 October 2016. For more information about employment taxes, visit our website.