Salary sacrifice - here today but could it be gone tomorrow?
The government has again announced in the Autumn Statement that it will actively monitor the growth of employers using salary sacrifice schemes and their effect on tax receipts - worried that it could be missing out on income.
Salary sacrifice is an arrangement which enables employees to top up employer provided benefits (eg pension contributions) by giving up part of their salary, which the employer then pays towards the selected benefit. Thereby both the employer and employee will pay lower national insurance contributions (NIC). A number of UK employers use these savings to bolster up their current benefits offering, or to provide benefits that often bridges the gap left by the state (eg private medical insurance to avoid long waiting lists on the NHS).
The Treasury and HMRC are concerned that salary sacrifice is a ‘loop hole’ for both employers and employees that is adopted quite widely. Closing the loop hole will bring more income to HMRC; an attractive outcome for the Chancellor given his continued assault on the deficit.
Salary sacrifice schemes are commonly used for:
- flexible benefit schemes where an employee waives part of their salary in exchange for selected non-cash benefits, such as the loan of a bicycle;
- when an employee converts a pension contribution to an employer contribution to achieve NIC savings;
- buying of childcare vouchers (which is currently being reviewed by the government); and
- buying extra holiday.
Employees can also benefit from the employer’s ability to purchase goods or services in bulk and therefore obtain a discount on price, for example on gym membership. This benefit is generally a taxable benefit in kind, but a NIC saving arises to the employee because only employer Class 1A NICs are payable on the benefit.
As salary sacrifice is used more widely than originally intended by the Government so this latest announcement continues to create a great deal of concern amongst employee benefits providers and, of course, employers who use salary sacrifice to make savings to fund other areas of reward and benefits.
In parallel to this announcement, the Office of Tax Simplification (OTS) continues to review tax and NIC. It is being suggested that the two forms of taxation could be merged by 2018 – therefore diluting savings incurred from salary sacrifice in its current form.
Therefore a review and perhaps removal of salary sacrifice by the Chancellor now may become irrelevant in the long term!
Will the end of salary sacrifce spell the end of benefits?
Salary sacrifice currently benefits many SME’s and basic rate tax payers, at a time when both employees and employers are looking to save and get value from every aspect of their pay, benefit and reward. Could removing salary sacrifice savings push employers to scale back benefits?
UK Plc. can only hope that the Treasury understands the additional costs many businesses currently face (eg living wage, IPT increase, re-enrolment). The outcomes from the salary sacrifice and OTS reviews can only be hoped to support employer provided benefits – which of course support wider social and economic objectives set by the Government. These wider objectives may though be overridden by the Chancellor’s continued desire to maximise short-term tax revenue.
This article was provided by Lane Clark & Peacock LLP.
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