Proposed new tax legislation affecting salary sacrifice for the provision of benefits-in-kind
Concerns over the rising tax cost of salary sacrifice schemes prompted the government to announce in its 2016 Budget that it would consider limiting the range of income tax and National Insurance contribution (NIC) advantages a benefit in kind (BIK) may attract in such arrangements.
On 10th August, following this Budget announcement, HMRC published a consultation document setting out a high-level proposal for the future tax treatment of BIKs offered via salary sacrifice.
The main proposed change is to introduce new tax legislation from 6 April 2017 that will make a BIK provided through salary sacrifice chargeable to income tax and Class 1A employer NIC, even if the BIK is normally exempt from both these charges.
What the changes will mean
The BIK charge will be calculated as the greater of the salary sacrifice amount or cash equivalent. Flexible benefit arrangements allowing the employee to trade BIK for cash pay or providing a flex fund including a cash option will be captured by the new rules in the same way as salary sacrifice arrangements. Certain benefits have been specifically excluded from the proposed changes and will continue to operate as at present.
Given recent government announcements the changes are not unexpected. It is good news that many of the benefits forming the mainstay of salary sacrifice programmes will, we understand, remain unaffected under the proposal. Many flexible benefits are already subject to tax and National Insurance yet remain popular with employers and employees because of corporate discounts, enhanced terms, the ability to spread the cost and the convenience of funding benefits via payroll.
However, it will be particularly important to clarify that key benefits, in particular group life assurance and group income protection, will not be adversely affected.
A clearer picture will emerge
Following the consultation we expect a clearer picture for all employers and employees as to which benefits offer tax and NIC advantages through salary sacrifice. The changes will also mean certain benefits will actually be more straightforward to administer, process and explain to employees without the need to structure benefit provision to achieve tax and employer NIC advantages.
In the meantime we are consulting with clients over the impact the proposed changes will have on their current benefit arrangements, and where necessary helping with supporting employee communications.
While these changes may affect the composition of the flexible benefits menu, they do not fundamentally undermine the value to both employer and employee of offering a menu of benefits that are relevant and adaptable to individual needs. We therefore expect leading employers to continue to operate successful and engaging flexible benefit programmes.
This article was provided by Willis Towers Watson.
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