Salary sacrifice at the altar

Government to restrict practice of giving up salary for benefits

Following the Budget 2016 announcement that the government would consider limiting the range of benefits that attract income tax and NIC advantages when provided as part of a salary sacrifice arrangement, a consultation document has now been released: Consultation on salary sacrifice for the provision of benefits in kind.

What is salary sacrifice?

Salary sacrifice arrangements normally take the form of an employee agreeing to give up cash remuneration in return for some form of non-cash benefit-in-kind. Depending on the benefit, the effect of this is to reduce the amount of income tax and NIC (employee and employers) due on the employee’s remuneration.

Example

The provision by an employer of a mobile phone to a director or employee for private use is exempt from tax and NIC. If it is therefore provided in addition to salary then there is no extra tax and NIC. However, where it is provided under a salary sacrifice agreement, both employee and employer can make savings.

A 24-month contract for a new mobile phone costs over £700. If purchased through salary sacrifice the following tax and NIC can be saved:

There has been an evolution in the way in which benefits are provided, with a growing market for flexible benefit packages, often combined with salary sacrifice arrangements. Between 2009/10 – 2014/15, HMRC has seen an increase of a third in PAYE clearance requests from employers for these arrangements. The government believes that this creates an uneven playing field between those who can benefit from the tax advantages of salary sacrifice and those who can’t, e.g employees with earnings at or near the National Minimum Wage or the National Living Wage. The real reason that the government want to close this loophole though is, of course, because the Exchequer is losing tax and NIC because of these arrangements.

Salary sacrifice can also artificially increase entitlement to tax credits or Universal Credit.

Proposals

The government proposes to change tax legislation, as from 6th April 2017, so that where a benefit-in-kind is provided through salary sacrifice, it will be chargeable to income tax and Class 1A NIC, even if it is normally exempt from such, at the greater of:

• the amount of salary sacrificed; and
• the cash equivalent set out in statute (if any)

This would mean that where the normal taxable value of the benefit-in-kind is higher than the amount of salary sacrificed, it would be subject to tax and Class 1A NIC in the normal way.

A number of employer-provided benefits will remain unaffected by these measures, those being:

• employer pension contributions;
• employer-provided pension advice on the recommendations of the Financial Advice Market Review (FAMR);
• employer-supported childcare and provision of workplace nurseries; and
• cycles and cyclist’s safety equipment which meet the statutory conditions.

Other health-related exemptions for benefits are in place to ensure that no tax/NIC liabilities arise where employers pay for and provide such things as health screenings for their employees, or because placing a value on the benefit to each employee would be difficult, e.g workplace gyms.

The proposals do not prevent employers from providing benefits to their employees via salary sacrifice but they will remove the tax and NIC advantages that are currently available.

Where salary is sacrificed in return for intangible benefits that are not taxed and do not rely on a specific tax exemption, such as where salary is sacrificed in exchange for extra annual leave or flexible working hours, then these too will be unaffected.

Closing date for comments is 19th October.