Salary Sacrifice – what is the impact of the changes?
We now have clarity of the position going forward following the Autumn Statement and the recently released HMRC guidance. It should be noted that there is a period of consultation on the draft legislation which will run until 1February 2017 and the final details will be confirmed in Budget 2017
The proposed changes are significantly greater than was initially suggested at the start of the consultation process and will impact on a large number of employers and their employees
There will be no change to the tax and NICs advantages of salary sacrifice arrangements for: pension saving into a registered pension scheme, employer provided pensions advice, employer-supported childcare, cycle to work schemes or Ultra Low Emission Cars (ULEVs).
The measure will have effect for all contracts for Benefit in Kind involving salary sacrifice arrangements entered into on or after 6 April 2017. Those employees already in such contracts at that date will become subject to the new rules in respect of those contracts at the earlier of:
- an end, change, modification or renewal of the contract
- 6 April 2018, except for cars, accommodation and school fees when the last date is 6 April 2021
ULEVs will retain their current tax treatment and will not be subject to the new rules.
The proposed relaxation over salary sacrifice car schemes which permits such arrangements to continue post 6 April 2012 for the ULEV applies to a vehicle with CO2 emissions below 75g/km. It will be interesting to see whether the leasing providers offering salary sacrifice car schemes can find appropriate vehicles to make this a viable option for those employers who still wish to offer the arrangement to their employees. On paper this looks tight given that at present many of the vehicles with a CO2 emission below 75g/km are expensive so not falling in the normal category of vehicle which would be suitable to take via salary sacrifice...I am sure those leasing companies will be working hard with manufacturers to see if appropriate vehicles can be sourced
The main concern is the decision of HMRC that the clampdown on salary sacrifice will be extended to include those employees who have a cash alternative in their contract of employment. According to the BVLRA this impacts on 580,000 employees in the UK who benefit from a cash or car policy and this clampdown would extend to other possible benefits.
The proposed changes will mean that employees will be taxed on the greater of the income tax on the benefit in kind or the cash alternative. If an employee takes the cash then this will have already been the subject to income tax and Class 1 NIC so there will be no impact. In the case though of an employee who takes a company car this is likely to mean a significant increase in the tax to be paid on this benefit. It is important that employers now look at their contracts with employees to see who may be impacted by this proposal and decide what approach they will adopt going forward. It should be borne in mind that this proposal impacts on any contracts entered into post 6 April 2017 and any revisions to contracts from this date or in any event from 6 April 2018.
It is my guess that many employers who have historically provided a cash or car alternative will decide whether this approach should be continued or whether a decision will be made to simply offer a car to those are essential users whilst offering cash to other employee groups. It is clear that determining the right approach for a business is not just a mathematical calculation but will need a fair amount of HR input.
The difficulty from experience in many businesses will be determining those with a cash alternative and of this population the amount of that cash alternative seeing whilst their may be benchmark rates per grade in the HR policy it is not uncommon for employees to have negotiated special terms when recruited
It is important for HR to appreciate that they need to alert the tax team of any employee who is issued a contract post 6 April 2017 or whose existing contract is revised seeing this will have an impact on the income tax due on the benefit they may take.
These proposals are not good news for employers and their employees and it is annoying that HMRC have decided to widen the clampdown on salary sacrifice to incorporate those workers on a cash alternative.
If you would like further information on the topics discussed in the article please contact Chris Denning, speak to your local MHA MacIntyre Hudson advisor or send enquiry.