1. DRAFT FINANCE BILL
‘Optional Remuneration’ (salary sacrifice) update
January 2017
Overview
For a while now, the Government has been concerned
with what they see as an inequality between those using
salary sacrifice to receive a benefit and those who do not.
They also feel that there are a great number of employees
unable to benefit from such arrangements as they are too
close to the National Minimum or Living Wage. They are
also concerned with loss of tax revenue and employer’s
National Insurance Contributions (NI).
From April 2017, new rules will apply when salary
sacrificing, which will mean the value of a benefit
sacrificed will be based on the higher of the amount salary
sacrificed or the benefit in kind value (‘cash equivalent’).
The subsequent value will be subject to Income Tax and
employer’s Class 1A NI which is collected by HMRC via the
P11D/P11D (b) process.
The intention is not to remove any existing employee
NI savings on benefit in kinds, reported on P11Ds, when
sacrificing. Also, where a benefit in kind is provided as
a core benefit (one funded solely by the company), the
current Income Tax and employer NI advantages remain.
The draft Finance Bill now refers to “optional remuneration
arrangements” to cover what is affected by the new
rules rather than salary sacrifice. Schedule 2 of the
draft Finance Bill covers this new addition to Part 3 of
ITEPA 2003 as section 69a. The idea of setting a separate
definition came during the consultation but its name only
appeared in the draft Finance Bill.
There are stated exemptions, transitional rules and
some issues still to be ironed out which we cover in this
document.
2. Benefits affected
The main benefits that will be affected by the new rules are:
1. Health assessments
2. Mobile phones
3. Cars
4. Car parking
5. Direct product
Although direct product is mentioned above, it is not clear
where a company provides its own product/service to its
employees whether it is still possible to salary sacrifice
the amount above the marginal rate agreed for the
product/service and still gain the current income tax and
NI advantages. So, for example, if an employee sacrifices
£100 for a company product/service but the agreed
marginal cost is £20 then the employee only pays tax and
employee NI on the £20 and the employer also only pays
NI on the £20. The consultation made reference to this but
no further detail has been made and no exemption given.
It is worth mentioning that there are many benefits in
kind where an employee does not pay NI and it is not the
intention of the new rules to affect flexpots/allowance
which remain free from tax and NI on the condition that
it is not exchangeable for cash.
Exemptions
Broadly speaking the following benefits will be exempt
from the changes:
1. Death and retirement schemes
2. Pension savings
3. Company funded pension advice
4. Bike to work schemes
5. Childcare vouchers
6. Ultra-low emission cars
7. Holiday trading
It seems clear that a death in service scheme is exempted
which means an excepted scheme is not.
We are waiting for clarity around whether Group Income
Protection will be affected by the changes.
Transitional rules
The overview from HMRC on the draft Finance Bill states:
Employees already in salary sacrifice contracts before
6 April 2017 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
This leaves the question of when is it considered that a
variation is in place? For example if a car is selected under
a salary sacrifice arrangement in March 2017 it may not be
delivered for three months at which point the reduction in
salary occurs. A contract variation may have been agreed
in March but, strictly speaking, the contract is varied
three months later. We are seeking clarity as to when it
is deemed to have been set up as, in this example, it was
signed up to before 6 April. It is also unclear if one novates
their car to a new employer, with no change to the amount
salary sacrificed, will it fall under the new regime? Also if
a TUPE employee novates, then what happens?
It is worth noting that as salary sacrifice agreements
(variation of contracts) fall under employment law, will it
be down to HMRC to decide when an agreement is in place
or will it based on contract law? Can HMRC contradict the
contract law position?
Actions
It is important that as an employer you do three things as
soon as possible. Review, change and inform.
Review
It is important to review the benefits that you offer, or are
considering offering, to your employees to see how they
may be affected by the changes being proposed. As a guide,
here are some things to think about:
TECH SCHEMES
Currently, if an employee receives a bit of tech (tablet or
laptop, for example) under a salary sacrifice arrangement,
it is a benefit in kind and its P11D value is based on the
term of the arrangement. So if the arrangement is over four
years, the P11D value is 20%, 20%, 20%, then 40% of the
asset value in the final year. If three years 20%, 20% then
60% year three and adjusted accordingly over one or two
years (assuming the employee keeps the asset at the end
of the arrangement).
An example:
A laptop is selected under a salary sacrifice arrangement
over two years. The sacrifice is £50 per month and the
laptop cost £1,200.
Year one the P11D value is 20% of £1,200 = £240
Year two the P11D value is 80% of £1,200 = £960
The £240 and £960 will be subject to tax and Employers NI.
Under the new rules the higher amount of the salary
sacrifice would apply. Therefore the value would be
25% each year for four years and 33.33% each year
for three years.
An example:
Based on the above laptop:
Year one: £600 (12 x £50)
Year two: £600
The £600 each year will be subject to tax and Employer NI.
As you can see, the difference is in the timing of the P11D
charge (not the overall amount) which over the period is the
same.
3. EXCEPTED SCHEME
Do you offer employees the opportunity to flex up their life
assurance? If this is done on an excepted scheme basis
rather than using a death in service scheme then it is
important to get clarity pre April 2017 that it will still gain
the tax and NI advantages it does now. Whilst an excepted
scheme could, like a death in service scheme, be deemed
a pension as it is not registered, it may not gain the same
advantages in the future.
GIP
If you allow employees to flex up their group income
protection cover you need to await confirmation from
HMRC that it will not come under the new rules. It is not
mentioned as being included or exempted at the moment
so you need to keep an eye on developments.
HOLIDAY BANKING
Whilst holiday buy and flexible hours are exempted, it is not
clear whether banking holiday is. It would seem logical that
it is, but the reason for exempting holiday buy and flexible
hours was to encourage flexible working, which it could be
argued banking holiday does not directly do. Regardless, if
you do offer this arrangement, ensure you have stringent
rules and a trust to keep the banked holiday from being
considered received income.
FLEXPOTS
It is also not the intention of the new rules to affect
flexpots/allowance which remain free from tax and NI
on condition there is no return to pay option. Do you allow
a return to pay? If so, review this from April 2017 and
consider increasing and expanding your allowances.
CARS
If you have a scheme in place and employees set up an
arrangement pre 6 April 2017, they have until April 2021
under the current rules unless they alter the agreement.
As already mentioned we need to await clarity around
when an arrangement is deemed to be in place.
The changes mean that when salary is sacrificed for a car,
the tax will apply to the sacrificed amount if higher than the
reported P11D value, which it generally is. This removes
any employee tax advantage and employer NI advantage
on the difference between the amount sacrificed and the
benefit in kind value.
If the car is provided as a core benefit (without a sacrifice
agreement) there is no change to the current advantage,
however the P11D cost is increasing for cars that are
not ultra-low emission, though this is not until 2020. This
gives you time to move to ultra-low emission cars and we
suspect the automotive industry will start to build cars to
put on your list.
Although the draft Finance Bill is focused on salary
sacrifice, the changes also affect company cars and, more
specifically, car/cash allowances. If you offer company cars
and/or car/cash allowances to employees then you need
to consider the fact that unless you restrict the allowance
so it is not exchangeable for cash, the new rules apply. The
issue may also arise if you allow trading up on your cars,
as the amount above the car grade amount may be seen as
a salary sacrifice and subject to new rules. As this would
only occur every two to three years or even four years it
may be that it could be considered as packaging of salary
rather than sacrifice. This would need to be tested.
Change
Having completed your review your will need to look
at options. Below are some suggestions that you may
consider for your benefits:
TECH SCHEMES
It is worth considering whether an immediate asset
transfer might be better so the P11D tax is payable straight
away and there is no ownership dispute at the end of the
contract. You could even consider advancing the employee
the tax charged so the cost is spread.
EXCEPTED SCHEME
If it is clarified that an excepted scheme does not gain the
same advantages, you could consider a death in service
scheme for those not affected by lifetime limits and retain
the advantages.
FLEXPOTS
As mentioned, it is not the intention of the new rules to
affect flexpots/allowance which remain free from tax and
NI on condition there is no return to pay option. If you do not
currently offer one then you may wish to consider this as
an option.
CARS
Consider changing the cars on offer for the future. Review
the ability to receive cash as an allowance. Look at
reviewing trading up.
Where you allow reconstruction (an adjustment of mileage
or period) a review of any that may need to do this should
be done pre 6 April 2017 to ensure they are not caught out
by the new rules.
Anyone due to get an improved car/cash allowance after
6 April should be reviewed to see if they should have one
now to avoid the new rules.
If you make no changes, or even if you do, ensure
communication is good.
Inform
It is really important that you communicate effectively and
positively with your employees. A lot of press is announcing
the death of salary sacrifice so they need to know the facts
and your plan of action. Keep it simple:
• What is happening: when and what are the transitional
rules?
• Which affected benefits are offered?
• What will it mean to employees financially?
• What is your plan of action?
