Salary sacrifice can be advantageous for employees as cash remuneration can be exchanged for non-cash benefits-in-kind (BiKs) which tend be outside the scope of both Income Tax and NIC. Employers too can benefit as many non-cash BiKs do not attract employer’s NIC. The use of such arrangements however has increased by a third between 2009/10 and 2014/15 and this has triggered concerns over the rising cost to the Exchequer. In response, the Chancellor announced at Budget 2016 that he was considering limiting the range of BiKs that could attract the Income Tax and NIC advantages.
What is staying the Same?
The Chancellor was clear in his announcement that the treatment of salary sacrifice in return for the following BiKs would not be affected:
This consultation, published following a change in Prime Minister and Chancellor, confirms that these BiKs will continue to attract both the Income Tax and NIC advantages even when offered as part of a salary sacrifice arrangement.
In addition, the consultation confirms that there is no intention to change the current rules where salary is sacrificed for intangible benefits such as extra annual leave or flexible working hours.
Furthermore, there is no intention to change the treatment of BiKs generally where they are not provided in connection with a salary sacrifice arrangement.
So for example, if an employer offers a cash salary and BiKs on top, no change is intended to the Income Tax or NIC treatment of those BiKs as they are not being provided as part of a salary sacrifice arrangement.
What is Changing?
Apart from the BiKs listed above which the Government wishes to support, the proposal is that all other BiKs offered as part of a salary sacrifice will be subject to Income Tax and NIC as follows:
Therefore many popular salary sacrifice arrangements, including company cars, mileage reimbursement, and workplace gym memberships are likely to be affected should the proposals made in the consultation be confirmed.
Under the new proposals, where a BiK is provided via salary sacrifice, it will be chargeable to Income Tax and Class 1A NIC on the higher of the cash equivalent of the benefit or the amount of salary sacrificed. This rule will apply even where an exemption or reduced benefit charge would otherwise have been available, under the normal application of the legislation.
Where these changes are made, it is likely that a significant number of employers and employees will be impacted and it will be crucial that employers start to look at how reward is structured, communicated and controlled so that any transition required to reward programmes and flexible benefit platforms is smooth.
Responses to the consultation have been requested by 19 October. An announcement is expected in Autumn Statement 2016 as to the outcome of the consultation and, if the decision is to proceed, the Government intends to legislate in Finance Bill 2017.
If you would like to discuss this consultation or any of the reform options further, please get in touch with your normal KPMG contact.
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