The doomsayers have been out in force since chancellor Philip Hammond announced sweeping changes to salary sacrifice arrangements in his 2016 Autumn Statement. ‘HMRC’s hand grenade on salary sacrifice’ said Money Marketing. ‘Tax grab puts salary sacrifice benefits on notice’ cried The Scotsman. ‘Benefits providers in turmoil as chancellor clamps down on salary sacrifice schemes’ exclaimed People Management’s own website.
But are the changes really having a dramatic impact on the benefits offered by UK employers? It’s worth scrutinising the finer details. Salary sacrifice occurs when an employee forgoes cash in exchange for a benefit-in-kind (BIK). These arrangements often reduce the amount of tax and employee and employer national insurance (NI) due on the employee’s remuneration.
In April 2017, the government limited the range of BIKs that attract these tax advantages – removing benefits such as health checks, gym memberships, car parking near the workplace, technology, accommodation, school fees and cars. Benefits that are unaffected by the changes include pension contributions and advice, employer-supported childcare, cycle-to-work schemes and ultra-low emission vehicles (those with emissions between 0g/km and 75g/km of CO2).
The government has said that, for employers with affected benefits schemes in place before 6 April 2017, there will be a grace period (of up to 6 April 2018, with some restrictions, or until 2021 for car, accommodation and school fee schemes – see bottom of the page for details).
But that doesn’t mean employers have nearly a year to finalise their plans. Steve Herbert, head of benefits strategy at Jelf Employee Benefits, warns that the guidance makes it clear that the new rules will apply to any existing contract, any new members or any changes to a contract from 6 April 2017. “The year of grace has been misinterpreted, and actually it isn’t a year of grace for many people at all,” he says.
As a result, employers should be conscious of any changes to their salary sacrifice arrangements. “We don’t have any clear instructions on what is a variation,” says Susan Ball, partner at Crowe Clark Whitehill. HMRC has been pressed for more details but, as yet, there is no clarification.
In the meantime, Ball suggests employers read the legislation to understand where they might be at risk; for example, is there anything that might act as a variation? “If you still have problem areas, seek advice,” she says. “And if you can’t get clarity, make a conscious decision and document why you did it.”
One of the main reasons for the lack of clarity is the late issuing of the employers’ guidance – it was only released on 20 March 2017, which has left little time for any issues to be ironed out, and made it difficult for some employers to plan their future benefits strategy.
“I imagine many employers will let their schemes roll on – even if that means tax implications for both sides,” says Herbert. “But they need to talk to employees, because you can’t let people roll into what is potentially a different contract, or a different cost, without telling them.”
Ultimately, employees’ ongoing engagement with salary sacrifice benefits will come down to how the changes are communicated. Debi O’Donovan, director at the Reward & Employee Benefits Association, says she has seen several organisations running positive campaigns. “[They were saying] ‘this is your last opportunity to sign up before it’s taken away’. That put a positive spin on it, as well as letting people know that salary sacrifice is going.”
But it’s still been a challenging time for employers. “We have had to rethink our reward strategy,” says Ian Hodson, head of reward at the University of Lincoln. Previously, it offered salary sacrifice schemes on car parking, training, company cars and sports centre membership, and used the employer NI savings to fund other benefits and programmes.
So far, the university has altered the design of its development scheme to offer loans to staff for training, shifting the emphasis to the loan function rather than the tax efficiency. The pricing structure of the sports centre membership has also been reviewed to ensure it is not prohibitive. New benefits, allowing employees to take additional annual leave and enjoy free tickets to the local football club, have been introduced to counter any negative publicity. “We wanted to remind staff that we still have a really good reward package and to offset any perspective that benefits are being taken away,” says Hodson.
Communication has also been key at building society Nationwide, where four of the 30 benefit options it offers are affected by the loss of tax efficiency. “But they will still provide good value because of the rates applied and the continued NI savings,” says Rosemary Crabb, senior manager of flexible benefits. “We reassured our employees that the impact on our scheme would be limited, and that losing the tax exemption wouldn’t mean that the benefits would be withdrawn.”
Even though some benefits will lose their tax exemptions, there are still good reasons for employees to opt for employer-provided offers rather than getting them directly from the high street. Purchasing technology products through an employer scheme, for example, can still be cheaper in the long run because of interest-free credit, says Martin Röver-Parkes, employee benefits product manager at Edenred.
And plumping for an employer car scheme not only takes away the hassle of maintenance and insurance (which are included in the cost), there’s no need to pay a deposit and employees can take advantage of corporate discounts. “In some cases, the BIK charge is higher than the tax you’ve saved [under salary sacrifice], which proves that the reason people take a salary sacrifice car isn’t because of the huge tax saving,” says Lauren Pamma, head of fleet consultancy at Lex Autolease. “It’s because of all the other benefits of hassle-free motoring.”
Although salary sacrifice schemes will incur higher costs for employers through lost NI savings and potentially higher administration charges, Hodson expects the future won’t all be doom and gloom. “We might see a steer towards benefits that are offered via a salary deduction,” he says.
Crabb expects employee benefits will take a slightly different path. “The next development in this area is likely to be the growth of new, own-design and bespoke benefits that reflect the people demographics, the working style and culture of the organisation and even its location,” she says. Others expect employers in some sectors to focus more intently on cash incentives, potentially concentrated on key individuals rather than the wider workforce, having decided bespoke benefits have become too complex and costly to justify. While this might represent a backwards step given how imperfect cash is as a motivator, it is something the benefits industry is bracing itself for.
But while there has been a lot of hype around the end of salary sacrifice, its death warrant shouldn’t be signed yet – though employers should be cautious about when the rules will apply to their schemes and not be complacent that they have a year’s grace. “Most employers need to be getting on and doing something – and quite a lot of them need to be taking action right now,” says Herbert.
Know the rules
Employers with affected salary sacrifice schemes in place before 6 April 2017 have until they make a variation, renewal or modification of the arrangement, or 6 April 2018 – whichever is earlier – to withdraw or modify the provision. This ‘grace period’ is extended to 6 April 2021 for car, accommodation and school fee schemes.
Don’t forget the cash
Alongside the amendments to salary sacrifice, the government has introduced updates to the rules on cash allowances and cash alternatives.
All the changes, including salary sacrifice, fall under ‘optional remuneration arrangements’. Specifically, the legislation splits these into two types. Type A applies when an employee gives up the right to an amount of earnings in exchange for a benefit (typically, salary sacrifice). Type B applies when an employee agrees to be provided with a benefit rather than an amount of earnings, such as a cash allowance or cash alternative.
Susan Ball, partner at Crowe Clark Whitehill, says employers are gradually realising that the changes will also affect benefits where there’s a cash alternative, such as cars. “HMRC takes the view that it probably won’t be a problem, because cash alternatives aren’t that great. But it is starting to flush out arrangements where that’s not the case.”
For example, if an employee has a car that emits more than 75g/km of CO2 – but is still a reasonably low amount – “with the level of tax charge, you could end up with a cash alternative that’s higher than the BIK charge”, Ball says.
Employers that haven’t realised these potential problems may face issues when they come to report benefits – both for themselves and the employee, who might have a higher tax liability to pay.