The UK government’s tax raid on salary sacrifice schemes kicks in next month, raising serious questions over the viability and desirability of many benefits provided to workers in this way.
Although existing schemes still have a year’s grace, eventually employees may find their paycheck has shrunk, as a result even of apparently socially beneficial packages, such as gym memberships. For employers, the changes mean the need to review their offer to staff and update payroll. However, some benefits are exempt and it may not quite witness the end of salary sacrifice schemes.
In the past, the term “salary sacrifice” was mainly used to refer to the giving up of rights to future cash remuneration in return for the employer’s contributions to a registered pension scheme. As the way that benefits are provided in the modern workplace has evolved, however, flexible benefit packages have become common, including childcare vouchers, cycle to work schemes, cars and parking, gym membership and many others.
The sums are not massive. HMRC’s analysis suggest that the clampdown announced by Chancellor Philip Hammond in the 2016 Autumn Statement will initially raise additional tax revenues of around £85 million in 2017-18, rising to £235m the next year and £260m by 2021-22.
Some critics branded salary sacrifice as a tax dodge, hence Hammond’s action. But from next month, tax and national insurance will become payable on the value of many salary sacrifice benefits. It will affect millions of employees across the UK.
Arrangements in place before that date will be protected until April 2018. Even more welcome is that for those employers providing salary sacrifice arrangements relating to accommodation, cars and school fees – benefits for which the relevant agreement in place can span several years – there will be an extended protected transitional period until April 2021.
However, there is a caveat. All new salary sacrifice agreements entered into or any renewals, modifications or changes to existing arrangements after April 2017 are subject immediately to the new regime. Serious concerns have been voiced in some quarters that a lack of awareness of the new measures will jolt both firms and workers when it transpires belatedly that they will be taxed in full on the value of these benefits. Industry professionals say that employers need to review their salary sacrifice arrangements and policies as soon as possible to assess the cost impact of the changes. The new regime does not prevent employers providing benefits in kind on top of an employee’s salary. But it is undeniable that the revised arrangements will ultimately mean that affected employees will pay more tax.
Some amelioration will be provided by the UK government’s intention to continue to increase the personal allowance over the next few years. However, the variations announced by the Scottish Government in its budget in December make matters more complicated for businesses and employees in Scotland, as for the first time middle-income taxpayers north of the Border will pay higher rates of tax than those in the rest of the UK.
Tax increases are not the half of it. Business says there will be increased IT and administration changes required within companies, including software upgrades to current payroll systems.
The government has made no bones about the fact that there will also be an ongoing cost to employers in complying with the new rules, such as additional reporting requirements around the submission of PAYE forms to HMRC.
It’s not all doom and gloom, however. The new rules will not apply to pension contributions or advice, childcare vouchers or the popular cycle to work scheme.
And in line with the drive towards green energy, the government also announced that ultra-low emission cars will be ring-fenced from the crackdown. Critics are disappointed that the new rules do not also exclude health-related benefits, such as health screenings and gym memberships when it is recognised that the health of the population is declining and the NHS is strapped for cash. This is no oversight from Westminster, however.
There had been calls to exclude health related benefits from the new rules, so the decision to tax them anyway looks deliberate.
While it is understandable that the government wants to crack down on salary sacrifice tax avoidance schemes following a number of high-profile cases, these measures will hit employers offering flexible benefit packages as a means of incentivising staff.
Unfortunately, there seems little option but to review all current salary sacrifice arrangements to assess their continued desirability.
• Lorna McCaa is a partner in the tax department of legal firm Maclay Murray & Spens