Tax increases with changes to salary sacrifice rules

Tax increases with changes to salary sacrifice rules

Employers should review their reward strategy to assess the impact of HMRC’s issued consultation on salary sacrifice.

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Employment Taxes Senior Manager

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HMRC has issued a consultation on salary sacrifice for the provision of benefits in kind which, if enacted, will remove the tax and National Insurance Contribution (NIC) savings for some benefits. Employers should review their reward strategy to assess the impact so they can respond accordingly.

Many housing associations have introduced salary sacrifice to support the provision of some benefits in kind to employees and to generate tax and NIC savings for the employer and employee.

Following research by HMRC, it is proposed that, from 5 April 2017, the rules will change so that where certain benefits in kind are provided as part of a salary sacrifice arrangement, the income tax and employer NIC savings will be removed.

 

The proposed new rules

The following benefits will be unaffected:

  • Employer pension contributions
  • Employer provided childcare
  • Cycles and safety equipment
  • Annual leave

All other benefits offered as part of a salary sacrifice will be subject to Income Tax and Employer NIC, on the larger amount:

  • Actual salary sacrificed, or
  • The cash equivalent of the benefit stated in the legislation (ignoring any special rules applying to exempt benefits).

 

What do you need to do?

Salary sacrifice is a key component of many employers’ reward strategies. It will be important to assess the impact of the proposed new rules in relation to:

  • The loss of tax savings for employees
  • The increased cost to the employer of providing certain benefits arising from the loss of NIC savings
  • Employee engagement if any changes are made to reward strategy
  • Employee and provider contracts to understand options in relation to the continued supply of benefits

HMRC has highlighted that the following popular salary sacrifice arrangements are likely to be affected:

  • Company cars*
  • Employer-provided technology e.g. tablet computers
  • Mobile phones
  • Work-related training
  • Car parking at or near the workplace
  • Workplace gym membership

*Many housing associations will need to review their company car scheme as the proposed rules are likely to extend to some schemes that offer a cash alternative to a company car. 

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