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Tax Benefits from a Salary Sacrifice Scheme to be Limited

Written by Jon Cooper

Amongst a whole host of HMRC consultations that are underway is one looking at “salary sacrifice for the provision of benefits in kind” with a view to introducing reforms from April 2017.

Since the turn of the decade, the level of PAYE clearance requests for salary sacrifice schemes has risen by over 30% and there is little doubt that the potential tax savings have been a contributory factor to this increase.

At the moment, under a salary sacrifice or flexible benefit scheme, an employee may be offered a benefit in return for a compensating reduction in salary and there is no restriction on what the benefit can be.

Take the example of a corporate gym membership that costs £700.00 per year. If this is provided to an employee under a salary sacrifice scheme, the cost to the employee in the basic rate tax band in the reduction of net pay would be £476.00. The remaining £224.00 would be funded by reduced Income Tax and National Insurance deductions from the lower salary. Moreover, the employer would save £96.60 of Employer’s National Insurance contributions.

For an employee in the higher rate tax band, the cost would be £406.00 and the Income Tax and National Insurance savings would be £294.00. The employer’s element remains the same.

The government is proposing that, from April 2017, the gym membership itself would be treated as a benefit in kind and, therefore, there would be no tax saving for either the employee or employer.

For the following specific areas, there will be no change to the current system with the tax savings remaining:

Whilst the proposals do not impose any constraint on the benefits an employer can offer under a salary sacrifice arrangement, everything else would be taxed as a benefit in kind.

Therefore, the only potential upside for the gym membership in our example or, say, a mobile phone contract or laptop, would be if the buying power of the company enabled it to attract a better price than the individual.

The taxable benefit in kind is set to start from 6th April 2017. The consultation document uses the example of and employee that starts to sacrifice £600.00 per year for a workplace parking space in September 2016. Until 5th April 2017, there continues to be no Income Tax or National Insurance due on the parking space but from 6th April 2017 it will be treated as taxable.

Employers would be required to report these taxable benefits in kind provided through salary sacrifice to HMRC in the same manner as other taxable benefits in kind that they already report, such as company cars or private medical insurance. Usually, this requirement is met by submitting P11Ds at the end of the tax year.

In our response to the consultation that we will be submitting at the beginning of October, we will highlight two main concerns.

Firstly, from the employee’s perspective, there will be no visibility that anything has changed. Taking the consultation document example, the payslip in March 2017 and April 2017 will be identical with a £50.00 salary sacrifice for the parking space reducing the gross pay.

It will only be when the P11D is submitted at around July 2018 that the tax liability for the 2017-18 would become apparent to HMRC and the tax would fall due.

Secondly, whilst the parking space is clearly optional and the employee can choose to end the arrangement at the end of March 2017, no provision has been made for instances where the employee is locked into an arrangement. For example, a two-year mobile phone contract with a third party vendor.

The employer and employee have made an arrangement in good faith under one set of rules only for these to change part way through with no exit strategy.

Whilst at the margin salary sacrifice or flexible benefit arrangements have been used to manipulate an employee’s income to reduce Student Loan repayments or to enable the continued entitlement to Child Benefit, broadly speaking these schemes have been operated as a genuine incentive to staff.

Although HMRC estimate that the overall cost to the Exchequer is in the region of £5 billion a year, it is clear that the vast amount of this is driven by pension contributions and childcare schemes that will remain unchanged.

As a result, we believe that it would be far more fair and equitable for this change to apply to new arrangements from 6th April 2017 onwards and for the resulting additional tax to be collected via the payroll rather than the P11D process.

If you have any questions, comments or concerns on this HMRC proposal, please email us at tax@cooperfaure.co.uk.

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