Chancellor Philip Hammond’s Autumn Statement decision to tax salary sacrifice schemes in the same way as cash income has been dubbed a curb on “middle-class perks”.
But what are the implications for employers?
Salary sacrifice schemes currently allow employees to exchange their salary for benefits. This means they can lower the amount of income tax they pay. This perk also benefited employers by lowering their national insurance contributions.
After the Autumn Statement though, the tax changes will impact salary sacrifice schemes differently.
Any existing arrangements, or new arrangements put in place before April 2017 will be protected up until April 2018. All arrangements for company cars, accommodation and school fees will be protected for up to 4 years up until April 2021.
Any existing arrangements, or new arrangements put in place before April 6 2017 will be protected up until April 6 2018. This protection is extended up until April 6 2021 for arrangements relating to company cars, accommodation and school fees.
Employers should be prepared for a probable surge in employee requests to take advantage of these benefits before the changes take effect on April 6 2017.
On the positive side, some benefits will be exempt from these changes. They are:
- cycle to work schemes and
- ultra-low emission company cars
All other newly created salary sacrifice schemes started after April 6 2017 won’t benefit from the previous tax advantages. Some of the popular benefits that have been enjoyed in salary sacrifice schemes but are not included in the exemptions:
- health screening checks
- school fees
- parking and
- gym memberships
The increase in national insurance contributions that will be due for these salary sacrifice schemes could be a significant financial burden for employers.
Employers should assess the financial impact of these changes and review their current flexible benefit schemes. In doing so, there are a number of important considerations to be taken into account.
Does the current salary sacrifice scheme that is in place help them to recruit and retain their staff and does it help them to stand out from competitors?
Employers can and do use their schemes to attract and retain the best talent by giving employees the ability to negotiate their own personalised package. Where the financial burden of keeping certain benefits is too great, employers should consider renegotiating their benefit packages after the relevant time limits or reviewing their funding plans to meet the additional costs. As employers benefit from a larger buying power, one option could be to repackage benefits and allow employees to purchase them at discounted prices from their net pay. This could help maintain supplier relationships and employee engagement.
If an employer wants to withdraw certain benefits, sensitive communication should be sent to employees at an early stage to ensure they understand that the changes are being driven by these amendments to legislation. This should help to avoid any potential employee disputes. An employer will also have to consider any contracts they have with suppliers of their benefit schemes as notice periods will probably have to be given.
Employers will also have an administrative burden. They will have to report any benefits in kind provided through salary sacrifice to HMRC and this reporting could involve changes to IT systems and payroll software. Another challenge is the varying time limits for the changes. It could lead to scenarios where two employees on the same benefits package will be taxed differently because of when their benefits package was negotiated. This could complicate the process and increase the risk of mistakes. Additionally, any necessary changes to HR processes will depend on whether employees were given benefits under a flexible benefits scheme, as part of their employment contract or both.
There is a lack of certainty in determining what a ‘salary sacrifice’ is and in what circumstances would the tax changes take effect. The Chartered Institute of Taxation highlighted an uncertain scenario in its response to the HMRC consultation on salary sacrifice:
- A candidate is offered a job after a successful interview. When the candidate asks for car parking, the employer grants his request but adjusts the salary. Is this salary sacrifice or simply a pre-contract negotiation?
For smaller businesses, the provision of benefits in kind is often more informal and flexible. Will these businesses lose the ability to informally renegotiate employee packages in response to changes in their circumstances?
The draft Finance Bill 2017 published on 5 December 2016 does not conclusively answer this question. It is hoped the government will address this issue in consultations on the draft legislation.
HMRC acknowledges the potential impact of the changes on employers in its response to the salary sacrifice consultation published on 5 December 2016. This includes the administrative burden of updating payroll software (which some employers estimate will take three months or more), the updating of employee handbooks and guidance, as well as discussions with trade unions and staff representative bodies. HMRC estimate the total on-going cost of administrative burdens to reach £3.3m per annum.
HMRC also accepted the need for clear guidance on the upcoming changes. We await this guidance together with a further consultation on the draft legislation.
If you need help with reviewing and amending the terms of contractual arrangements where benefits in kind are provided, we can help.
We will make sure that the correct employment procedures are followed in contractual negotiations and we can offer general HR support to help with any complications arising out of these changes.
Call our Employment law team now on 0117 926 4121 or make a free enquiry online.