Serious threat to Cash or Benefit arrangements
In August 2016, HMRC launched a ‘Consultation on salary sacrifice for the provision of benefits in kind’. The indication is to bring in law changes from April 2017.
Salary sacrifice/exchange, flexible benefit schemes have all grown aggressively over the past few years as employer access to technology and systems and the introduction of new and more obscure schemes have become widely available. Jane Ellison MP (Financial Secretary to the Treasury) has stated that ‘this growth represents an increasing cost to the Exchequer and creates and uneven playing field…’
So what is a salary sacrifice and does it impact anything else? These are agreements between the employer and employee to change the employment contract – the employee takes a pay cut in exchange for non-cash Benefit in Kind (BiK). However, employees whose pay is close to National Living or Minimum Wage cannot participate else the employer could be committing a criminal offence by paying under the National Minimums allowed. ‘Those employees who are not able to participate… are at a disadvantage’. So some employees are able to ‘receive the BiK at a reduced cost at the expense of the Exchequer’, plus salary sacrifice can cause artificially increased entitlements to tax credits or Universal Credit.
The proposal limits BiK item tax and NICs advantages offered by employers through salary sacrifice to those being promoted by government: Pension Savings; pension advice; employer-supported childcare and cycle to work. BiKs offered on top of salary will not be affected, however, this is not the case where there is choice of cash or benefit such as for Company Car Schemes. Although such schemes are on top-of regular salary, HMRC currently consider the option of Cash as bringing the car scheme into challenge under these salary sacrifice proposals. So employers who do not have salary sacrifice schemes may also be impacted.
As no employee NICs are due on most BiKs, the proposals apply to income tax and employer NI (Class 1A).
But some caution – HMRC state that ‘references to salary sacrifice should also be referring to relevant flexible benefit arrangements in which the employee can exchange cash remuneration for one or more BiKs.
So what is caught:
- Flexible Benefit scheme where a cash lump sum is available for allocation to cash pay and BiKs are caught as these are utilising equivalent salary sacrifice arrangement
- Company Car schemes which offer Car or Cash allowance– these are considered to be caught as there is employee choice
And what isn’t:
- Flexible Benefit schemes where cash pay is fixed, and there is an allocation of amount to only be used for setting the employer provided BiKs are not caught as there is no option for Cash pay
- Company Car schemes where the arrangement is for only Car or only cash allowance – this is not caught as there is no on-going choice!
‘The government proposes to change tax legislation so that where a BiK is provided by such arrangements, ‘it will be chargeable to income tax and Class 1A employer NICs, even if it is normally exempt … at the greater of: the amount of salary sacrificed; and the cash equivalent set out in statute’. This removes the tax advantage from the employee and the NICs advantage from the employer.
Payroll Giving to charity remains, however, salary sacrifice employer charitable giving is captured as Class 1 NICs on both the employee and employer will be due. So schemes where an employee can give a day’s work for a charity donation from the employer lose their current NICs free status.
Many scheme lock employees in for a period of time and part of the consultation is to ask for views on what should happen?
Following implementation of the proposals (and any revisions), employers will be required to report BiKs provided through salary sacrifice to HMRC through the P11D/P11D (b) process or voluntary payrolling and the P11D (b) process for the payment of Class 1A.
Employer must take not and review their arrangements. Even though some may not be considered Salary Sacrifice at all (such as Car Allowance), other cash or benefit on top arrangements are captured by the proposals.
Employers must review:
- Any Cash or Benefit arrangement
- Consider implications for flex bens software, payroll and payroll pay element setting
- Implications for P11D or voluntary payrolling