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HMRC Consultation on removal of Salary Sacrifice Arrangements

 

Posted on 8 September 2016

In the last few weeks HMRC have issued a number of consultation documents that will potentially have a significant impact on employment tax planning and compliance.

Consultation on salary sacrifice for the provision of benefits in Kind – published 10 August 2016

In the 2016 Budget the Government announced that it was considering limiting the range of benefits that attract income tax and NIC savings when provided as part of a salary sacrifice arrangement. The consultation document published proposes that, with effect from 6 April 2017, the only salary sacrifice arrangements that will continue to attract income tax and/or NIC savings will be:

  • Pension contributions;
  • Employer provided pension advice;
  • Employer supported childcare and provision of workplace nurseries
  • Cycles and cyclist’s safety equipment (Cycle to work schemes)

HMRC has also confirmed that there will be no change where salary is sacrificed for intangible benefits that are not taxed and do not rely on a specific exemption, such as where salary is sacrificed for extra annual holiday or flexible working hours.

If the new legislation is implemented as suggested, salary sacrifice schemes will remain but, with the exception of the arrangements listed above, they will become reportable benefits on P11D. In effect, where a relevant benefit in kind (BiK) is provided through a salary sacrifice arrangement, it will be chargeable to income tax and Class 1A NIC, even if it is normally exempt, at the greater of:

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

This would mean that where the normal taxable value of the BiK is higher than the amount of salary sacrificed, it would be reported on P11D for tax and Class 1A NIC in the normal way. As things are currently presented, the proposals mean that there may still be a potential Class 1 NIC saving for the employee (12% for BR taxpayers, 2% for HR and above), but all tax advantages and employer savings will disappear.

Salary sacrifice arrangements affected will include:

  • Company Car
  • Gym membership
  • Car parking
  • Work related training
  • Mobile telephones
  • School fees (private school employees)

For those organisations who offer any of the above salary sacrifice arrangements, they have the option of continuing to operate the arrangements, with a resultant reduction in savings for the business and additional taxes for the employees, or they can withdraw the arrangement with effect from 6 April 2017. Either scenario will require a sensitive communication exercise with employees to ensure that they understand the position, and that the adjustment is as a result of legislative changes and not a business driven decision.

We expect to receive final confirmation of the proposed changes at the Autumn update (usually in November). At that point, and if appropriate, the Smith Cooper employment tax team can help you to manage this delicate situation by:

  • Assessing the potential financial impact, for both your business and your employees, arising from the changes.
  • Assessing which option is the most appropriate for the business (continued operation or cessation of each offering).
  • Reviewing the original terms of the agreements to ensure that the communication with the employees regarding the changes is accurate and easily understood.
  • Considering whether any of the remaining available salary sacrifice opportunities offer any benefits to the business and its employees.

In the meantime, if you wish to discuss this issue further, please contact Laura or Mick directly.

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