Understanding the potential impact on group protection of the HMRC Salary Sacrifice Consultation
HM Revenue & Custom’s (HMRC) ‘Consultation on salary sacrifice for the provision of benefits in kind’ seeks to understand the impact of removing many income tax and National Insurance (NI) advantages available to employees and employers using a salary sacrifice arrangement.
The need for change is understandable. The exchequer is losing out on needed revenue, while employees earning above the minimum or living wage can sacrifice salary in exchange for benefits such as TVs, home computers and white goods. HMRC’s consultation paper is looking to rebalance the position.
The proposed changes preserve the tax and NI advantages of a salary sacrifice arrangement for benefits that align with some Government welfare objectives. These include employer pension contributions, employer-supported childcare and some cycle incentives.
We’d argue there’s also a need for a clear exemption for Group Income Protection and Group Life Assurance benefits too. Giving employees access to this insurance provides any benefits to employers, employees and the State.
Group Income Protection is designed to provide income and appropriate support to employees unable to work because of an illness or injury. It aims to support skilled workers back into the workplace with many insurers offering:
- Funded rehabilitation and return to work programmes.
- Funded Employee Assistance Programmes.
- Support before, during and after a claim; helping prevent long-term absence and allowing a lasting return to work.
- An income during absence provided through payroll and subject to deductions for tax and NI.
- Pension contribution cover.
Group Income Protection aligns with Department of Work and Pensions objectives, provides a taxable income, and can reduce the cost of means-tested State benefits.
Group Life Assurance cover can help towards providing financial security for the dependants of an employee who dies as a lump sum or dependants’ pension. It can provide cover for registered scheme benefits, or if unregistered, as an Excepted Group Life Policy (EGLP). Registered life assurance shares common tax rules with registered pension schemes, and the consultation is unclear if employers could treat the cost of this benefit as an ‘employer pension contribution’.
- Beneficiaries less likely to rely on the State.
- The pension income is taxable.
- Bereavement counselling is often available.
Group Income Protection and Group Life Assurance are recognised valuable benefits. Favourable taxation incentivises employers to provide them as part of an employee benefits package.
If the proposed changes go ahead unchanged, flexible policies for Group Life Assurance and Group Income Protection will need to consider the differing tax treatment of the employer and employee funded costs. Flexible policies provide a minimum funded benefit from the employer, and allow employees to sacrifice salary for extra cover. This helps employees tailor benefits to better meet their needs.
Additionally, employees paying for further flexible Group Income Protection out of taxed income could expect to receive any benefit they funded tax-free; leading to dual taxation of benefits.
An employer providing these benefits will also need to consider the proposals impact to its employee communications, and any employee facing platforms used to display benefit choices.
We’d encourage employers to look out for Autumn Statement 2016 for further clarity. The consultation suggests the Finance Bill 2017 could introduce the proposed changes as early next April 2017.
Michael Hawkes is product manager at Legal & General
This article was provided by Legal & General
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