From April 2017, the income tax and employer National Insurance advantages of salary sacrifice schemes will be removed, (that is to say with the exception of certain arrangements relating to pensions, childcare, cycle to work schemes and ultra-low emission cars).
What this means in practice is that those employees who chose to use their salary to acquire certain benefits will pay the same tax as if they had simply received the salary itself.
As things stand currently, most benefits an employee choses to ‘exchange’ salary for are exempt from employee’s NICs, and beyond that many also have favourable employer’s NICs and tax treatment. It is therefore often very tax efficient for both employers and employees to agree to ‘swap’ their fully taxable salary for benefits with favourable tax treatment, in that it reduces an employers NIC bill and at the same time reduces an employee’s overall tax burden.
As detailed, the changes are due to come in in April 2017, however, any arrangements in place before that date will be protected until April 2018, and certain arrangements relating to cars, accommodation and school fees will be protected until April 2021.
Whilst the changes will not be welcomed by employees or employers alike, following a period of uncertainty during consultation, at least business’ offering flexible benefit packages now have some certainty about the future of their salary sacrifice arrangements.
Two other related proposals are also worth a mention. Firstly, the government intends to consider how benefits in kind are valued for tax purposes, and intends to publish a consultation on employer-provided living accommodation and a call for evidence on the valuation of all other benefits in kind at Budget 2017.
Secondly, and also at Budget 2017, the government will also publish a call for evidence on the use of the income tax relief for employees’ business expenses, including those that are not reimbursed by their employer.
It is clear to see that the subject of expenses and benefits is some what of a ‘hot topic’ at the moment, and, of course, it remains to be seen what affect these changes may have on structuring of employee incentive and benefits packages.
If you have any queries on this or any other aspect of employee taxes, please do give us a call.