The abolition of tax incentives on the majority of salary sacrifice schemes was one of the biggest stories to come out of last November’s Autumn Statement.
Chancellor Philip Hammond announced that, from April 2017, most benefits offered via salary sacrifice will be subject to the same tax and National Insurance (NI) contributions as a cash salary.
Given the current popularity of salary sacrifice, this will have wide-ranging implications for a large number of businesses.
In many cases, employers will be faced with difficult a decision on whether to continue with existing arrangements without the tax advantages or to provide equivalent benefits without the salary-sacrifice element.
Here we take a look at five key considerations for employers in the wake of the changes to salary sacrifice.
What exactly do the changes mean and when do they take effect?
Salary sacrifice allows employees to receive benefits by ‘sacrificing’ a portion of their pre-tax salary, effectively paying for the benefits from their gross income.
Thus employees avoid paying tax and NI on the sacrificed amount, while the employer saves on its own NI contributions. Following the changes, benefits provided via salary sacrifice will be subject to the same tax and NI contributions as cash salary. Companies will also have to pay employers’ NI contributions of 13.8% on those portions of salary that can no longer be sacrificed.
Changes come into force from 6 April 2017 although arrangements for cars, accommodation and school fees are protected until 6 April 2021. Salary sacrifice arrangements already in place before 6 April 2017 will continue to benefit from tax and NI incentives until 6 April 2018 or the end, change, or renewal of the contract.
Pensions and pensions advice, childcare, bikes-for-work schemes, and ultra-low emission vehicles (ULEVs) will continue to be allowed.
Good communication is key to managing the transition.
If your organisation intends to continue offering the same benefits, it is important for employees to understand exactly how the changes will affect take-home pay. Essentially, if benefits are still offered on a salary sacrifice basis, it will equate to the same impact as the employee paying for them from their net salary.
This will undoubtedly lead to a large number of questions from employees – and potentially considerable workload for HR and Reward teams – so it makes sense to anticipate questions and prepare factsheets in advance.
It may be also be appropriate to canvas opinion among employees – perhaps through surveys, focus groups and briefings – regarding which benefits are viewed as most desired or essential in order to start shaping a long-term offering that meets need.
Reviewing uptake of benefits
It would be advisable to do a ‘stock take’ to assess take-up, usage and value of benefits. Some benefits such as health assessments may not be taken annually so it may be prudent to look at more than one year of data.
Analysis could look at the return on investment (ROI) offered by existing benefits, based on factors such as reduction in benefits spend, premium reductions, uptake, engagement and staff appreciation.
If benefits cost more to the organisation than the perceived value received by employees then they may not be working effectively enough.
On the one hand, benefits must offer choice and flexibility while covering the entire employee lifecycle. But on the other hand, too much choice can be a negative and it may be better to offer a smaller pool of more targeted benefits.
Rethinking the employer-paid/voluntary mix
After reviewing uptake and popularity, the next step is to re-examine the mix of benefits that are employer-paid versus those offered on a voluntary basis.
Given changes to the cost of benefits caused by the changes to salary sacrifice, it may be a suitable time to re-evaluate how benefits are paid for.
Benefits defined as ‘essential’ throughout the review process and consultations with staff might be offered on a company-paid basis as they offer the necessary ROI. They could then be supplemented by a range of voluntary benefits, which allow the employee to benefit from choice and flexibility while paying a lower cost than equivalent consumer products.
This might mean an unravelling of existing flexible benefits schemes to provide a more strategic selection of benefits that meet the needs of both employees and the business.
The business case
Given the increasing cost of providing benefits for employers, it makes sense to identify which offer value for this extra investment. This means a shift away from providing benefits simply as an employee perk and a greater focus on designing schemes to meet business needs.
When making plans, employers should be aware there is a lack of clarity surrounding some arrangements, in particular excepted group life policies and income protection.
In current salary sacrifice arrangements, the premium is paid before tax so the benefit is subject to benefit in kind tax (BIK). But it has not yet been made clear whether they will continue to be subject to BIK when purchased from taxed income. If so, income tax will have been levied twice, on the original income and the benefit.
HMRC is expected to issue a statement of clarification late January.