SALARY sacrifice has long been an attractive way for both employers and employees to reduce their tax and National Insurance (NI) bill, while staff benefit from perks such as childcare, gym membership or healthcare schemes.
Under salary sacrifice schemes employees give up a portion of their salary in return for benefits-in-kind. This typically reduced the amount of their income that is subject to tax or NI contributions and reduces the NI bill for employers.
But with the cost of such schemes to the Exchequer rising steadily over the years, changes have been introduced. Since 6 April of this year the tax advantages are no longer available on health insurance, gym memberships, and mobile phone contracts. However, it is still possible to benefit from tax advantages on the following:
* Pensions contributions/pensions advice
* Childcare vouchers/arrangements
* Ultra-low emission company cars
* Cycle to work schemes
There are also some exemptions on other benefits, albeit for a limited time only. For salary sacrifice schemes involving cars, school fees or accommodation the cut-off date is 6 April 2021.
The changes do not prevent employers from offering other benefits, such as gym memberships, as part of an employment package and through salary sacrifice schemes, but they mean employees who take up those benefits will now have to pay income tax on them.
However, there will be no change for employers who offer salary sacrifice schemes for ‘intangible’ benefits such as shorter or flexible working hours or additional holiday allowance.
If you, as an employer, offer your staff benefits without either reducing their salary or without offering a cash alternative, then there is no change to the tax treatment. Equally this is the case if employees are buying benefits out of their post-tax salary.
Where employers had already set up schemes before the April 2017 cut-off point, then these are allowed to carry on and employees to continue to benefit from the tax perks until the contract is modified or terminated, or comes up for renewal, or failing that, by 6 April 2018, whichever of these is earliest. The new rules will then apply.
Employers setting up a new salary sacrifice scheme, now or in the near future, will have to ensure that they familiarise themselves with the new rules, and make any necessary changes to the payroll. It is also worth employers looking at the post-tax and NIC costs to the business and also to the employee, of offering benefits under the new system.
According to figures from HM Revenue & Customs, there will be a cost to employers and employees of about £85 million in 2017/2018 as a result of the changes. This is expected to rise to £260 million by 2020/2021.
The extra NIC costs for employers may mean it is no longer viable for some firms to offer some benefits in this way, while other companies may decide to absorb the financial hit in order to ensure employees still have access to the benefits they value. After all, offering a range of benefits, on top of a good working environment, can help to both attract and retain quality staff.
Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.
For more information, contact Brian Lehane at Handelsbanken Northampton on 01604 638489
or email BRLE02@handelsbanken.co.uk
