Salary Sacrifice Schemes: What Next?
Announced in the Autumn Statement, new legislation concerning salary sacrifice schemes will come into affect on 6 April 2017
Towards the end of 2016 The Finance Bill 2017 was published, containing provisions intended to eliminate tax advantages that many previously enjoyed through entering into salary sacrifice schemes.
Salary sacrifice schemes are agreements undertaken between employers and employees to provide non-cash benefits. However, changes to such schemes, announced in November’s Autumn Statement, mean that employers who have these arrangements in place must prepare to adhere to the new legislation coming into effect from 6 April 2017.
The change is due to the government’s concerns regarding an increase in the use of salary sacrifice arrangements, especially as employees effectively pay for the benefit themselves through the reduction in their gross pay.
What changes are proposed?
Consultation documents suggested that where an employee enters into any salary sacrifice after 5 April 2017, a tax charge will be based upon the greater of:
- The salary sacrifice; or
- The cost to the employer in providing the benefit
This approach will apply even where the benefit is normally exempt from tax and Class 1A National Insurance.
Will any benefits remain included in these schemes?
The following favourable benefits will be outside the scope of the “optional remuneration arrangements”:
- Pension contributions;
- Pension advice;
- Childcare arrangements;
- Cycle to work schemes; and
- Ultra-low emission cars
It will therefore be possible for these benefits to be provided as part of a salary sacrifice arrangement without being subject to the new legislation. The government has confirmed that employers will be able to make available “intangible benefits”, such as additional leave, by entering into flexible working arrangements via salary sacrifice without invoking the new legislation.
Employers can proceed with a degree of certainty, and the ability to adopt salary sacrifice for employee pension contributions for staff who do not participate in a defined benefit pension scheme. This will prove exceedingly helpful regarding the requirement under the Workplace Pension Regulations, where both the employer and employee will have to make combined minimum pension contributions of 8% by 6 April 2019.
The draft legislation includes transitional rules to help employers and employees adapt to the proposed changes.
Under these rules, where an employee has entered into an arrangement before 6 April 2017, they can continue to benefit from the tax and National Insurance advantages until 2018. If the following benefits are enjoyed, the transitional period is extended to 5 April 2021:
- Living accommodation; and
- School fees
However, the transitional period will be foreshortened where one of the following events occurs before the end of the transitional period:
- The arrangement comes to an end; or
- There is a change to the arrangement; or
- Modification to the arrangement; or
- Renewal of the arrangement
The first of the “tests” is fairly clear cut and should represent a natural end of the benefit being provided. However, the remaining “tests” will present some challenges for the transitional rules to be provided up to either April 2018 or 2021.
There are six additional points employers need to consider given the new legislation:
- Tax once the scheme has ended: the employee’s earnings will revert to their pre-sacrificed amount, liable to income tax and National Insurance
- Higher rate: this tax could be at a higher rate meaning the employer will have increased National Insurance liability
- Apprenticeship Levy: an increase in earnings will affect these calculations
- Pension contributions: there may be an increase in this, dependent upon whether the employer arranged for pension contributions to be calculated by reference to the pre- or post-sacrificed salary
- Employees need to consider:
- Annual Allowance;
- Lifetime Allowance; and
- Increase in pension contributions
- State benefits: and any other salary linked entitlements may be impacted by increased earnings
The following are key action points leaders of small businesses should be considering:
- Responding to the consultation, regarding draft legislation. The consultation period is due to end on 30 January;
- Advising employees that tax efficient salary sacrifice arrangements are ending, and whilst there are transitional rules in place until 2018 (extended to 2021 for selected benefit arrangements) the likelihood is that the current year’s arrangement will be last;
- Varying the existing arrangements before 5 April in order to fully maximise the transitional period;
- Arranging for new participants to enter into arrangements before 5 April;
- Advising employees that salary sacrifice can continue, or be introduced in respect of favoured and intangible benefits;
- For employers with a payroll cost of £3m or more it will also be necessary to take into account the impact of the Apprenticeship Levy which is due to commence on 6 April; and
- Offering salary sacrifice in respect of pension contributions, as well as the other favoured benefits
The changes within the draft legislation are far reaching and go beyond preventing the use of salary sacrifice arrangements in the future. Employers should now review their existing arrangements and prepare for the impact of the new legislation.
Nick Bustin is director of employment tax at haysmacintyre