Employers and employees must weigh benefits of salary sacrifice

Westminster's tax grab on salary sacrifice schemes will start hitting workers and employers in the north east next month, with potential knock-on effects to health and well-being, as perks such as gym membership become less appealing.

However, reports of the demise of salary sacrifice schemes are exaggerated.

The term “salary sacrifice” was mainly used to refer to the giving up of rights to future cash remuneration in return for the employer’s contributions to a registered pension scheme. However, as the way in which benefits are provided in the modern workplace evolved, flexible benefit packages have become increasingly common: childcare vouchers, cycle to work schemes, cars and parking, and gym membership are among the many benefits provided on what was until now a tax efficient basis.

As part of the 2016 Autumn Statement, the Chancellor Philip Hammond reported that many employees who sacrificed part of their salary for benefits in kind paid less tax. Believing such arrangements to be unfair, he announced new measures to limit the range of benefits that attract income tax and national insurance contributions relief when provided as part of a salary sacrifice arrangement. HMRC’s analysis suggest that the changes will initially raise additional tax revenues of around £85 million in 2017-18, rising to £235 million for the next year and £260 million by 202122.

From April 2017, tax and national insurance contributions will become payable on many salary sacrifice benefits, although existing schemes will get a further year's grace. An extended transitional period until April 2021 is available for salary sacrifice arrangements relating to accommodation, cars and school fees – benefits for which the relevant agreement in place can span multiple years.

However, employers should remember that all new agreements entered into, and any renewals, modifications or changes to existing arrangements after April 2017, will be subject immediately to the new rules. A lack of awareness of this could leave firms and employees owing tax and National Insurance.

Certainly, there is no getting away from the fact that the revised arrangements will ultimately mean that affected employees will paymore tax, as it becomes due on the higher amount of the salary sacrificed or the cash alternative. A possible mitigation is the government’s intention to continue to increase the personal allowance over the next few years.

However, for those of us in Scotland, it will be necessary to take note of the variances announced by the Scottish Government in its budget in December 2016 which saw, for the first time, confirmation that middle-income taxpayers in Scotland will pay higher rates of tax than those in the rest of the UK. Under the newlegislation, Scotland will become the highest taxed part of the UK.

Aside from the associated tax increases, there will also be IT and administration changes required within companies, including the possibility of needing to implement software upgrades to any current payroll systems, which will all have cost implications.

While the government understandably felt the need to crack down on salary sacrifice tax avoidance schemes, these new measures are far more wide-ranging and will impact employers offering flexible benefit packages as a means of incentivising staff. With few advantages left for employers offering benefits outside the exceptions under the new regime, it is questionable how many will continue to do so.

However, it's not all doom and gloom: The new rules will not apply to pension contributions or advice, childcare vouchers or the cycle to work scheme. And in keeping with a drive towards green energy, the government also announced that ultra-low emission cars (defined as those with CO2 emissions of up to 75kg/km) will be unaffected by these new measures. Crucially, in the modern working environment, they do not affect current schemes where salary is being sacrificed in return for intangible benefits, which are not subject to tax such as extra annual leave days or flexible working hours.

But it is disappointing that the newrules do not also exclude health related benefits, such as health screenings and gym memberships, from their application. At a time when it is recognised that the health of the population is declining, Scotland is reportedly facing an obesity crisis, and the NHS is cash-strapped, this seemed the ideal opportunity for the government to support employers wishing to promote a healthy policy amongst their workforce. Their inclusion in the widened tax net is deliberate, though: There had been calls in responses to the consultation to exclude health related benefits from the new rules, but the Treasury pushed on regardless.

Of course these new measures do not prevent employers from offering salary sacrifice arrangements - it's just that there will no longer be a tax benefit to the employee or national insurance contribution benefit to the employer in doing so. This means that north-east firms need to take careful stock of the benefits they provide to staff, and discuss with employees whether they still see an advantage to them.

Nor do the measures prevent employers providing benefits in kind on top of an employee's salary. Indeed, these are regarded by many employers and employees as an important aspect of the modern workplace, and perhaps the benefits of a healthy workforce alone will be enough for many organisations to continue offering health and fitness related incentives to their staff.

Coupled with the fact that many schemes will remain open for major exceptions to the clampdown, such as pensions in particular, salary sacrifice schemes are likely to stay on the business landscape for some time to come.

However, it is essential that businesses review their schemes at this stage, to inform employees of the tax implications and plan accordingly.

Lorna McCaa is a partner in the Tax Department of Maclay Murray & Spens.

Chancellor Philip Hammond