On 23rd November, New Chancellor Philip Hammond took centre stage as the Government published its Autumn Statement, or ‘Budget-Lite’ as we like to call it. Employees and employers have been particularly interested in this year’s publication following on from the Government’s Consultation on Salary Sacrifice for the Provision of Benefits-in-Kind. The Consultation closed in October and therefore this presented the first opportunity for Government to publish their conclusion.
What we already knew
The Consultation was around limiting the scope of Benefits in Kind where the recipient and/or employer benefit from Tax and NI savings when offered through a Salary Sacrifice scheme. It was widely acknowledged that some reform of the controls governing this area were inevitable, not least as Government continued to seek additional ways of reducing the budget deficit.
Benefex’s Response to the Consultation
We had the opportunity to respond to the Government’s proposals and put in our two cents:
Regarding salary sacrifice arrangements which don’t strictly involve the receipt of a benefit, we suggested that – in the case of life assurance and insurance products (income protection and personal accident), the employees would be the main victims of any restrictions, and, being subject to tax and NIC initially, and then again when making a claim, would be overwhelmed with taxable instances.
Regarding differing considerations for small/large businesses, we suggested that a lot of small businesses will suffer as they simply will not be able to afford to offer benefits were there to be a greater cost in the absence of any tax savings. Public sector businesses could also suffer, as they cannot offer additional benefits on top of base pay as part of their total reward, hence the wide use of salary sacrifice to aid with staff retention and motivation.
Regarding mitigating any negative consequences of the proposed changes, we suggested that the extent of the changes is key. So far, the government has exempt pensions, healthcare and childcare-related benefits from the proposal, however we believed it needed to go a step further and exempt those benefits which have a positive effect on skills, productivity and lower emissions.
Outcome of the consultation regarding the above:
Pensions, health-related benefits, and childcare benefits remain untouched
As proposed in the consultation: childcare vouchers, pensions and cycle to work will continue to be eligible for salary sacrifice savings.
Partial reprieve for ultra-low emission vehicles
A partial reprieve on the initial scope of the salary sacrifice consultation became apparent today, with ultra-low emission vehicles (ULEVs) being excluded from changes announced today in the Autumn Statement. However, for many other key benefits such mobiles phones, life assurance and health checks, which many employers have extended to their employees through a salary sacrifice arrangement, this reflects a change in policy that will present a real cost to both employees and employers.
Timing is everything. The transition period needed to be sufficient to allow employers and their workers to adjust. A lot of flexible benefits arrangements (plus others) do not operate on a tax year basis, and overlaps will cause confusion. Grandfathering arrangements also needed to have a clearly defined ‘effective date’. We believed that, in every aspect, an expected ‘start date’ of the proposed changes of April 2017 would be too soon to make necessary adjustments.
Outcome of the consultation regarding the above:
Grandfathering available but April 2017 remains a key date
April 2017 remains the date beyond which new salary sacrifice arrangements will be subject to the new legislation. Grandfathering provisions have though been incorporated into the Autumn Statement. For the majority of benefits entered into before April 2017 the tax position will remain unchanged until April 2018. Salary sacrifice tax saving protection for arrangements for cars, accommodation and school fees ends in April 2021.
Employee contracts will require review
For employers, salary sacrifice arrangements form part of employees' contractual terms and conditions. Employers will therefore need to look at these arrangements and assess whether, and how, benefits will be continued post-abolition of salary sacrifice.
April 2017 - Removal of salary sacrifice tax saving, except for arrangements relating to pensions (including advice), childcare, cycle to work and ultra-low emission cars.
April 2018 - For those salary sacrifice arrangements not excluded above or associated with cars, accommodation and school fees, employees swapping salary for benefits will pay the same tax as the vast majority of individuals who buy them out of their post-tax income.
April 2021 - Salary sacrifice tax saving protection for arrangements for cars, accommodation and school fees end. The effect is that this extends the period of tax saving by an additional 3 years compared to other benefits affected by this change of legislation.
At this stage, it is unclear from the Autumn Statement whether the changes are effective 1 April or 6 April each year. Whilst a reasonable expectation would be that the effective date would align with the financial years and 6 April, we will be looking to confirm this as more detail is published.
Benefex’s plan to accommodate the changes
Regarding the likely impacts on employers and employees of limiting the scope of BIKs via Salary Sacrifice, we expect a full impact assessment to be undertaken by employers which considers not just the direct costs but also the indirect costs and benefits of the proposed changes in their entirety. Employers will continue to want to use benefits as a method of differentiating themselves in the market, with the aim of attracting and retaining talent. Benefits are also key in helping shape the corporate culture of businesses and whilst intangible, it is no less an important consideration. From a budgetary perspective, a key consideration for business leaders is who will bear any increased cost in benefit provision and whether an employer has the flexibility to cease providing a benefit that has become prohibitively expensive.
Whilst this represents a significant change in tax legislation that will be an unwelcome distraction for employers navigating a post Brexit landscape, pensions, childcare vouchers, cycle to work schemes and vehicles in the case of those that are ultra-low emission have been excluded from the scope of the policy changes. However, those who do incorporate benefits outside of this bracket do not need to panic; Benefex are with you all the way to ensure you are well equipped to support you during this period of transition. Our teams will then be providing their expert knowledge and working with our clients to explore the key impact of this announcement for each of them.