Autumn statement: Restrictions coming on salary sacrifice regime
Chancellor announces plans to restrict salary sacrifice benefits.
In 2015 the government embarked on an evidence gathering exercise on the cost to the Exchequer of salary sacrifice schemes. In a consultation document which closed on 19 October 2016, the government revealed some concerns, including:
the growth in popularity of schemes partly because of potential overall tax savings by employers. It quoted an increase of a third in PAYE clearance requests from employers for salary sacrifice arrangements between 2009/10 and 2014/15
specific marketing of schemes as tax and NIC saving vehicles
employees using such schemes being unaware of ‘side effects’ such as the potential reduction in the level of contributory benefits such as statutory maternity pay and Jobseeker’s Allowance, or in the level of occupational pensions which can be referenced to post salary sacrifice levels of remuneration
salary sacrifice schemes might artificially increase the entitlement to tax credits or universal credit.
What has been announced? In his Autumn Statement, the Chancellor said that the majority of employees were taxed on a cash salary, but that some who sacrificed part of their salary for benefits in kind paid less tax and national insurance, and the Treasury wanted to reduce the difference between the two.
This means that employees swapping salary for benefits will pay the same tax as the vast majority of individuals who buy them out of their post-tax net salary.
The government estimated the savings achieved by this measure would depend on the behavioural response by employers and employees – and whether or not employees decide to stop using salary sacrifice or employers decide to cease to operate salary sacrifice.
There seems to have been limited research on the impact and any subsequent increase in costs on the public purse from employees ceasing the arrangements. Given these uncertainties, the government still calculated it would save £85m in 2017/18 through the restriction of salary sacrifice followed by savings of £235m per annum in the tax years from 2018/19 to 2020/21 and a saving of £260m in 2021/22 – a total saving of over £1bn by April 2022.
It is not clear just how many employees would be affected. Some estimates put the figure potentially in the millions.
Further detail Before panic sets in, general arrangements in place before April 2017 will be protected until April 2018, and arrangements for cars, accommodation and school fees will be protected until April 2021.
The original HMRC consultation closed on 19 October 2016. This stated certain benefits would be unaffected by the proposals as the government ‘wishes to encourage employers to provide these to employees’. These were:
employer pension contributions
employer-provided pension advice
employer-supported childcare and provision of workplace nurseries
cycles and cyclists' safety equipment provided under the cycle to work scheme.
However, HMRC has now confirmed that the new rules will also not apply to salary sacrifice for low emission cars, defined as those with CO2 emissions of up to 75g/km.
What other benefits are likely to be affected? Apart from the above details, the announcement did not give a clear list of all benefits which were affected. However, in the consultation there were references to other payments such as:
workplace car parking
mobile phone contracts.
The government’s Autumn Statement summary refers to the measures covering ‘most’ schemes so we can only assume until clarification that there will be few benefits (apart from those listed earlier) that will escape the restrictions.
Related announcements The Chancellor also announced that the government will consider how benefits in kind are valued for tax purposes, publishing a consultation on employer-provided living accommodation and a call for evidence on the valuation of all other benefits in kind at Budget 2017.