How to Stay Safe from HMRC
15 September 16 | By: Jas Jhooty
Last month HMRC launched a 10 week consultation into removing the tax & NIC advantages of some Salary Sacrifice schemes. The government has observed a marked increase in the take up of Salary Sacrifice schemes over the last few years with a corresponding hit to Exchequer in lower tax & NIC receipts. Estimates have been made that the cost to the Exchequer could be as high as £15 billion per annum!
The government argues that as any salary sacrifices made cannot take employees below the National Minimum Wage threshold they are inherently unfair to lower paid employees. They also say that they are concerned that many participants of salary sacrifice schemes are not aware that there may be knock-on effects from reduced pay to employees’ entitlements to contributory benefits such as statutory maternity pay and Jobseeker’s Allowance etc.
The government are also concerned that reduced pay can artificially increase employee entitlement to tax credits and Universal Credits thereby further increasing the cost to the Exchequer.
They also argue that as it is predominantly larger employers who offer flexible benefits schemes incorporating salary sacrifice arrangements, they are unfair because employees working for smaller employers cannot enjoy similar savings in lower tax & NIC charges.
For these reasons the consultation document proposes to change tax legislation so that where a Benefit-in-Kind (BiK) is provided through salary sacrifice, it will be chargeable to income tax and Class 1A employer NICs, even if it is normally exempt from tax and Class 1A NICs, at the greater of:
This would mean that where the normal taxable value of the BiK is higher than the amount of salary sacrificed, it would be subject to tax and Class1A NICs in the normal way.
This proposal does not prevent employers from providing BiKs to their employees through salary sacrifice, but it will remove the tax and NICs advantages that come from doing so. Employers can still use salary sacrifice if they wish and the taxation of BiKs will be unaffected if offered outside of the salary sacrifice arrangement.
There will be no change 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.
Payroll Giving will not be affected by this change. Where an employer offers Payroll Giving, the employee is able to donate to a charity of their choice from their salary before income tax is deducted. There is no corresponding NICs relief for the employer or employee.
The government is aware that some schemes operate through salary sacrifice arrangements to access the NICs relief that would not otherwise be due. The government is therefore considering that in these circumstances both employer and employee NICs should be applied.
There are a number of important exemptions from these proposals including:
The government’s also intends that certain health-related benefits such as cycle to work should continue to benefit from relief when provided through salary sacrifice arrangements. Other statutorily exempt medical benefits continue.
The government has carefully considered the case for carving out other health-related BiKs from the change, but has ruled this out.
The government’s intention is to proceed with these changes through legislation in Finance Bill 2017. This would be subject to technical consultation as part of the normal draft Finance Bill process.
It is the government’s intention that the legislation would take effect from 6 April 2017.
This is an important consultation that has been anticipated for over 18 months. As has happened many times over the recent past with similar tax efficient schemes (e.g. the Home Computer Initiative), the government now intends to pull the rug out from under the well established industry of salary sacrifice scheme providers. They also do not appreciate the real life value of such schemes in aiding employers to retain key staff.
If you have any comments about these proposals please email us at firstname.lastname@example.org so that we can collate them and make representations to HMRC on your behalf.
Please do not hesitate to contact us if you require any further information about these proposals.