With the huge uptake of salary sacrifice arrangements meaning an unexpectedly higher loss of revenue, the government is now considering restricting the benefits that can be included in salary sacrifice arrangements.
The consultation, which remains open until 19th October 2016, is considering how the tax and national insurance benefits currently enjoyed by both employees and employers will potentially be removed. The proposal is to restrict the tax savings on the benefits which are considered to be more of a perk and less than a necessity.
They have however confirmed that any restrictions will not affect pension saving, childcare, workplace nurseries and health-related benefits such as cycle to work schemes.
Where the provision of a benefit is currently tax-free, a value equivalent to the salary sacrifice would be included on a P11d or taxed through the payroll. This would negate the potential tax saving for both and the employer would be liable for national insurance. Examples of benefits that would be affected include health screening, car parking, mobile phones and non-core life assurance.
An example of how the scheme currently works for tax-free benefits is detailed below.
Kate is an employee paying income tax at the marginal rate of 40%. She is considering taking out a new personal mobile phone contract worth £1,000 per annum. Her employer suggests that the company instead enters into the mobile contract in return for Kate giving up £1,000 of her gross salary. Kate agrees as the net cost to her is just £580, being the reduction in her take home pay after taking into account income tax and NICs (£1,000 less 40% income tax and 2% NICs at marginal rates). She has therefore saved £420, as the provision of the mobile phone by her employer is a tax-free benefit. Also, the company has saved employers’ national insurance of £138 (13.8% x £1,000) due to the salary reduction.
Benefits that are not tax-free but tax advantageous due to a reduced benefit in kind would attract a value equivalent to the salary sacrifice, not the benefit in kind and taxed through a P11d or payroll as above. Typical of this type of sacrifice would be car schemes.
No firm time line has been set for the Government to consider the recommendations following the consultation but it is thought they may be introduced as early as April 2017.
For more information on salary sacrifice arrangments, please get in touch with our tax team at firstname.lastname@example.org or by calling 01254 679131.