As you will no doubt be aware, we recently saw the introduction of changes to benefits in kind provided through a salary sacrifice scheme.
The changes, introduced into law as part of the Finance Bill 2017, came into force on April 6th and carry with them some big implications for employers across the UK.
So what are the changes and what do they mean for UK employers? Why did the government decide introduce changes to benefits in kind in the first place? Helena Smith, employment lawyer at leading law firm LHS Solicitors outlines everything businesses need to know about the changes.
The context: why are benefits in kind changing?
The government first indicated it wanted to review rising costs of benefits in kind provided through salary sacrifice schemes in the summer budget of 2015. In the Autumn Statement that year it announced it would endeavour to investigate the main drivers behind the growing cost of salary sacrifice.
Fast forward to the 2016 budget and the then Chancellor, George Osborne, announced the government’s intention to formally consult on proposals to alter benefits in kind.
This was because the government was concerned about the growth of salary sacrifice arrangements and their fairness on the tax system. The government also believed this developing trend was creating what it termed ‘an uneven playing field’ between employees and employers who use those arrangements to benefit from tax advantages, and those who don’t.
While in some cases benefits in kind are offered in addition to a salary, there are many instances where benefits in kind are provided as part of a salary sacrifice scheme. This means, for example, a good such as a mobile phone could be provided as a benefit to an employee – and that the cost of the phone and its contract would be taken out of their wages before tax and national insurance (NI) are applied.
In this scenario, the employees wage and, income tax is reduced and both employee and employer NI contributions are reduced too. In turn, this reduces the amount of money flowing to the Exchequer. The government was concerned about this in itself, and also mindful that salary sacrifice schemes could artificially increase entitlement to tax credits or Universal Credit, as the net income received would be lower.
In short, the government did not believe that benefits in kind, effectively paid for by employees themselves through reductions in gross salary, should be able to be provided by employers at a cost to the Exchequer through salary sacrifice arrangements.
What the changes mean for employers
Move forward to April 6th 2017 and we arrive at the introduction of legislation aimed at remedying the perceived shortfall of cash making its way to the Exchequer – packaged within the Finance Bill 2017. So what does the new legislation they mean for UK employers?
The first thing to say is that the changes do not prevent employers from providing benefits in kind to their employees through salary sacrifice schemes. However, the changes do remove the tax and national insurance advantages that come from doing so. The tax payable for benefits in kind remains unaffected if they are offered outside of a salary sacrifice arrangement.
Those benefits in kind which are affected are classed in two categories by the government. These are:
- Type A: arrangements under which the employee gives up the right, or the future right, to receive an amount of earnings (for example salary) which would be chargeable to tax under Section 62 ITEPA 2003 in return for the benefit
- Type B: arrangements, other than type A arrangements, under which the employee agrees to be provided with a benefit rather than an amount of earnings (for example the option of a cash allowance).
If an employee selects a benefit instead of cash pay, the taxable value of that benefit will be based on the amount of cash sacrificed or the taxable value of the benefit under normal rules – depending on which is greater.
Some things remain the same
There are some exceptions to the new rules, which are important for employers to be aware of. In some instances, benefits in kind delivered through salary sacrifice schemes will not be affected.
This is the case if the benefit in kind is childcare vouchers or employer provided childcare, ultra-low emission vehicles, bikes for work schemes and equipment associated with those schemes, contributions to registered pension schemes and pensions advice.
However, if the benefits in kind your business is delivering through a salary sacrifice scheme do not meet any of the above categories then the tax benefits previously associated with their provision will be removed.
There is a transitional period which means that salary sacrifice arrangements entered into before April 6th 2017 will remain unaffected until April 6th 2018. For schemes involving vehicles which emit more than 75 CO2/km, living accommodation and school fees, changes will not come into effect until April 2021.
If there is a variation or modification to the benefits in kind arrangement, however, then the rules will come into force. This covers renewals and auto-renewals – however the arrangement won’t be considered to have been varied if any variation has been in response to accidental damage or for reasons beyond control of the parties involved. For example, should a company car be vandalised and therefore replaced – this would not trigger the imposition of the new benefits in kind rules.
For all schemes entered into after April 6th which do not fall into the exempt categories, tax benefits will be removed. Examples of the benefits affected include provision of white goods, such as mobile phones, and car parking spaces.
For many employers the main implication of this change in rules is that they will be reporting different taxable values in relation to their staff’s incomes. In April 2018 HMRC is set to introduce a new version of the P46 (Car) and a new P11D which will ask for details of any salary sacrificed to allow reporting on the extra information.
Before that introduction, employees who need to pay more tax can either call HMRC or wait for the normal P11D process to pick up corrections after the end of the year.
Helena Smith is employment lawyer at LHS Solicitors.
Further reading on salary sacrifice
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