For quite some time now, the Government has been concerned with the way the provision of benefits has evolved. There is now a growing market for flexible benefits, and salary sacrifice arrangements have gained popularity with employers as they see the obvious benefits of using them as a tool for employee retention.
But many within Government fear that the rise of such benefits could create inequality between those using salary sacrifice to receive a benefit and those employees close to the National Minimum or Living Wage who are unable to participate in such arrangements. Coupled with the Government’s growing concerns surrounding potential loss of tax revenue, and employer’s National Insurance Contributions, it was only a matter of time before the Government made the decision to take action.
From April 2017, the Income Tax (Earnings and Pensions) Act 2003 will include new sections 69A and 69B and some consequential amendments in other sections. The changes are also extended to capture other combinations of benefits such as the provision of cash alternatives to benefits – the legislation now refers to ‘Optional Remuneration Arrangements’ (OpRA).
But what will these changes mean for employers and employees alike?
Under the new rules, the amount subject to income tax and NICs will be
the higher of the amount sacrificed or the benefit in kind value (the amount which is reported on employees’ forms P11Ds). But this subsequent value will now be subject to Income Tax and employer’s Class 1A NICs which is collected by HMRC via the P11D/P11D (b) process (or payroll where registered with HMRC) . That being said, it is not the Government’s intention to remove any existing Class 1 NIC savings on benefits provided by way of OpRA. A number of benefits will be affected by the introduction of the new rules but the main ones of note will be:
- Health Assessments
- Mobile Phones and other technology devices
- Car Parking
- Direct Product
One really interesting thing to come out of these new changes is the effect they will have on tech schemes. If an employee sacrifices salary in exchange for technology through their work, usually they pay for it over a period of time say for 2, 3 or 4 years, and pay tax, based on 20 per cent of the market value at the time of purchase, under the ‘use of asset’ rules – this is where ownership of the technology remains with the employer during the contract
At the end of the contract, and when ownership passes to the employee, the tax due effectively takes into account the employee has paid 20% ensuring that they don’t pay more than 100 per cent. It is still not clear whether this ‘off-set’ will be allowed under the new rules and if not, employees will be ‘double taxed’ which is against the spirit of the Government trying to ensure that people/ businesses pay the right amount of tax at the right time.
HM Revenue and Customs (HMRC) has produced some additional guidance with many examples of how the new legislation is intended to work, but with only weeks before the legislation comes into effect, there are still some areas where further clarification is required.
In conclusion, I think we’re moving towards what I would call ‘salary packaging’ rather than salary sacrifice. Now people are deciding how much of their overall pay package they want to pay for in salary and how much they want to take as an allowance towards benefits.
By using an allowance towards benefits, employees are essentially overcoming any changes in the law as they are gaining the same tax and national insurance advantages as they do now.
Here at Mazars, we provide a joined-up approach to help our clients. I am an employment tax specialist but we also have employee benefit experts.This allows us to approach each salary sacrifice case from two angles – from the employment tax point of view – and looking at how it applies to the benefits themselves. Such joined up thinking means we can help our clients review and plan for a strategy.
It is really important that employers communicate with their employees effectively and positively making sure they know the facts including: what will happen as a result of the new rules; what benefits will be affected; what the changes will mean for them financially and what the plan of action is.
It is also important to make sure employers speak to an expert in the area who will be able to help position employer benefits so that they still work or replace them with more attractive alternatives. Despite all the impending changes, there are a number of benefits in kind that still gain employee NIC advantages. The key is to look at what is available and decide which ones would be best to add to your offering.
Vaneeta Khurana is the National Head of Employment Tax at international accountancy and advisory firm, Mazars.