Philip Hammond’s billion pound raid on salary sacrifice will see products bought through flex lose tax and National Insurance advantages, in a bid to equalise the tax treatment of employees receiving benefits through the sytem and those receiving identical benefits outside it.
The Chancellor used his first Autumn Statement to outline how the removal of tax and NI advantages from salary sacrifice arrangements will save the Treasury £1.05bn over the next year, costs that will be borne by employers and employees through higher tax bills.
Experts are predicting lower take-up of valuable protection insurance and preventative medical care, such as health screenings. Employees will also no longer benefit from access to lower cost computers and phones.
Pension, cycle to work, ultra-low emission cars and childcare vouchers are exempt from the changes.
The Government will publish a call for evidence on how benefits in kind are valued in the 2017 Budget and a call for evidence at Budget 2017 on the use of the income tax relief for employees’ business expenses, including those that are not reimbursed by their employer.
It is not yet clear how far the changes will go, and whether Hammond wants to destroy the concept of salary sacrifice for employee benefits altogether. The Autumn Statement document says: “Employers can choose to remunerate their employees in a range of different ways in addition to a cash salary. The tax system treats these different forms of remuneration inconsistently and sometimes more generously. The government will therefore consider how the system could be made fairer between workers carrying out the same work under different arrangements and will look specifically at how the taxation of benefits in kind and expenses could be made fairer and more coherent.”
Experts say this could be read as suggesting all tax and employer and employee NI advantages will be wiped out. But the document goes on to say “Following consultation, the tax and employer National Insurance advantages of salary sacrifice schemes will be removed from April 2017.” This more limited approach would see the employee NI advantage remain, making salary sacrifice through flex less attractive, but still offering some tax advantages.
It is also unclear whether the Chancellor is purely targeting elective salary sacrifice, where the employee has the alternative of taking cash instead of the benefit, or whether the policy initiative will extend to non-optional benefits that avoid employer or employee NI or income tax by being paid for directly by the employer. This latter approach could possibly see the consultantion on benefits in kind, unveiled in the Autumn Statement, reform P11D charges to reflect the full cost of both employer and employee NI, and income tax, where benefits are provided.
The Chancellor has been criticised for a lack of joined up thinking for not exempting group life or group income protection bought through salary sacrifice from the changes at a time when the DWP/Department of Health consultation on work, health and disability is calling for ideas on how to stimulate growth in the sector through tax breaks.
Critics have attacked the relatively short timescale for the changes, which come in from April 2017 for new arrangements and which require the majority of existing salary sacrifice arrangements to be unravelled by April 2018, even though the consultation hasn’t yet been launched. Arrangements for cars, accommodation and school fees will be protected until April 2021.
Willis Towers Watson senior consultant David Robbins says: “We have an unknown in that it looks inconsistent if some employees can pay different amounts of tax depending on how the benefits are engineered. It may be the Chancellor is happy to tighten up the tax leakage and not declare war on employee benefits. Or it could be that this is a first step towards a wider benefits crackdown.
“My reading of what has been published is that the proposals mean different things for different sorts of benefits. Things like mobile phone contracts and onsite gyms are free of employer and employee NI and income tax if they pay for them directly. But if there is the option to take it or leave it through salary sacrifice, then under the new approach you would lose the income tax and employer NI advantage. For other benefits such as company cars, the current position is less favourable because they are already subject to income tax and employer NI but at a statutory valuation that is lower than the reality. These benefits could be reformed so they reflect more accurately the actual value being received.”
Grid spokesperson Katharine Moxham says: “We are obviously disappointed that Government has not seen fit to give an exemption for group life or income protection where employees are able to increase their coverage through salary sacrifice. The amounts involved are small and the resulting change will simply add complexity for providers and scheme members. It will add a further burden on businesses which might otherwise have included a facility to allow their employees to build on a basic level of employer-provided cover.
“Grid put forward the case for the provision of these benefits to be encouraged as they reduce the burden on the State, both through reduced expenditure on State Benefits and increased revenue through tax and NI, provide value to employers and employees and are aligned to DWP goals of supporting people back to work.
“The outcome is particularly pertinent for group income protection given that the DWP/DH green paper on work, health and disability has recognised the role that group income protection can play in supporting employers’ health, wellness and attendance programmes. Clearly some joined up thinking needs to take place here.”
Benefiz director Tim Gillingham says: “These proposals will reduce the take-up of these schemes and put more pressure on the platforms to calculate tax and NI. I think it will also make the schemes where employers give a cash allowance more difficult to administer so these may move to pure salary deduction.”