Protection benefits should get the same salary sacrifice advantages as pensions says Canada Life Group Insurance scheme underwriting specialist Alan Sparks
Since the Olympics have finished I have spent a lot of time thinking about HMRC’s consultation on salary sacrifice for the provision of benefits-in-kind. Launched in August, the consultation closed in October with an anticipated change date of 6th April 2017.
Working for a group risk insurer the first thoughts are does it affect our products, should it affect our products, what might we need to do and how should we respond? Wider thoughts are will it affect the market and will the proposed legislation do what it is supposed to do?
The background is that HMRC are worried about the amount of employment taxes that they may be missing out on due to salary sacrifice arrangements. They are particularly concerned about schemes for mobile phones and company cars. They quote an example of a £700 mobile phone and car contract where the Exchequer could lose £321 for a basic rate taxpayer and £426 for an additional rate tax payer.
The issue arises as the guideline for some benefits in kind does not meet the economic value. There is a complete exemption for provision of a mobile phone to an employee for private use. For company cars the taxation scale is adapted to a green agenda, so a car with low CO2 emissions has reduced tax.
The basic approach taken is that, when a benefit-in-kind has come through salary sacrifice, income tax and national insurance should be paid on the full economic value – thus removing any advantage. However the Government has also recognised that it wants to encourage certain behaviours, so has excluded employer pension contributions, employer provided pension advice, employer supported childcare and cycles and cyclist’s safety equipment
Group risk insurers believe that their products should also be excluded, as they align with the Government’s desire for personal economic resilience and can save the state money by reducing financial hardship if employees are ill, injured or die.
From a technical standpoint it may be that group life insurance is already excluded when provided under a registered pension scheme, although clarity would assist. The growing market for excepted group life cover fulfils the same needs and should also be excluded.
Group income protection provides employee and employer with a range of rehabilitation support so that a sick employee can return to work quickly. If a benefit becomes payable this is delivered through payroll and tax continues to be paid, with less need to apply for means tested state benefits.
Most group risk insurance is provided by the employer without any use of salary sacrifice. But it is often included within a formal flexible benefit programme. In these cases there is usually a core benefit and the employee can elect for higher cover to meet their own circumstances. The complexity of having different tax treatments for different parts of each benefit should not be underestimated. A further factor is that preparation for an annual January selection window would already be underway, with a lack of certainty about what to tell employees.
Looking wider it does appear that this is only likely to affect formal arrangements that have been established by larger employers. Where a company wants to offer choice to all employees there will be documented procedures in place and salary sacrifice is obvious. If there are informal discussions around the package for senior employees or within a small company these would not clearly be a salary sacrifice.
Overall the additional considerations may reduce the growth of new flexible benefit arrangements and some existing schemes may be simplified. Protection benefits for the employee serve an important function for the employer, their employees and families and the Government and should be treated like pensions under these proposals.