Wealth & Finance International
Changes to Salary Sacrifice Schemes Changes to the salary sacrifice schemes used by employers to provide a wide range of benefits to employees were announced by the UK government in November 2016’s Autumn Statement.
he change in legislation is due to the UK government’s previously expressed concerns regarding the growing use of salary sacrifice arrangements, especially as the employee is effectively paying for the benefit themselves through the reduction in their gross pay, with the Government collecting less tax and National Insurance as a consequence of the salary sacrifice.
Employers can proceed with a degree of certainty and the ability to adopt salary sacrifice for employee pension contributions for those employees who do not participate in a defined benefit pension scheme. This will prove exceedingly helpful bearing in mind the requirement under the Workplace Pension Regulations where there will be a requirement for both the employer and employee to make combined minimum pension contributions of 8% by 6 April 2019.
Employers who have these arrangements in place must now take notice of these changes and prepare themselves to ensure they adhere to these new rules.
Transitional rules The draft legislation includes transitional rules which will help employers and employees adapt to the proposed changes. Where an employee has entered into an arrangement before 6 April 2017, they can continue to benefit from the tax and National Insurance advantages under the salary sacrifice until 2018. Where the arrangement relates to one of the following benefits, the transitional period will be extended to 5 April 2021: • Cars; • Living accommodation and; • School fees.
Draft legislation The Government published its consultation on 10th August 2016, which included the framework to address the perceived inequality created using salary sacrifice. On 5th December 2016, The Finance Bill 2017 was published and contains the provisions which are intended to eliminate the tax advantages previously obtained by entering into a salary sacrifice. The new legislation will come into effect from 6 April 2017.
However, the transitional period will be foreshortened where one of the following events occurs before the end of the transitional period: • The arrangement comes to an end or; • There is a change to the arrangement or; • Modification to the arrangement or; • Renewal of the arrangement.
It is proposed that where an employee enters into any salary sacrifice after 5 April 2017 a tax charge will be based upon the greater of: • The salary sacrifice or; • The cost to the employer in providing the benefit.
The first of the ‘tests’ is fairly clear cut and should represent a natural end of the benefit being provided. However, the remaining ‘tests’ will present some challenges for the transitional rules to be provided up to either April 2018 or 2021.
This approach will apply even where the benefit is normally exempt from tax and Class 1A National Insurance. Favourable benefits The provision of the following favourable benefits will be outside the scope of the “optional remuneration arrangements” which are: • Pension contributions; • Pension advice; • Childcare arrangements; • Cycle to work schemes and; • Ultra-low emission cars.
Other points to consider • Once the salary sacrifice arrangement comes to an end the employee’s earnings will revert to their pre-sacrificed amount which will be liable to income tax and National Insurance; • Depending upon the nature of the benefit provided, for some employees this could mean they will be liable to income tax at a higher rate; • The employer will potentially have an increased National Insurance liability; • The employer will also have an increase in earnings for the purpose of calculating the Apprenticeship Levy; • Potentially there will be an increase in pension contributions, although this will be dependent upon whether the employer arranged for pension contributions to be calculated by reference to the pre-or post sacrificed salary;
It will be possible for the above benefits to continue to be provided as part of a salary sacrifice arrangement and not be subject to the new legislation. The government has confirmed employers will be able to make available ‘intangible benefits’ such as additional leave, by entering into flexible working arrangements via salary sacrifice without invoking the new legislation.