Limitation of salary sacrifice
There has been a significant rise in the number of employer provided benefits in kind (BiKs) under salary sacrifice arrangements over the last five years. Under these schemes, employees agree to sacrifice part of their salary, and in return, they are provided with a range of benefits.
These benefits range from pension contributions to childcare vouchers, mobile phones and even cars, and have been seen as a way to reduce employer costs, pass some savings on to employees and also to recruit and retain staff.
From 6th April 2017, HMRC is introducing measures to limit the Income Tax and employer NIC advantages when BiKs are offered under salary sacrifice arrangements, or under circumstances where an employee can choose between cash allowances and BiKs.
What changes are being introduced?
As mentioned above, a salary sacrifice arrangement changes an employee’s contract and involves a reduction of salary in return for a BiK, such as a phone or a car. For some BiKs the value used to report and calculate any tax and NICs liability is less than the value of the cash pay forgone, and may give both the employee and employer the option to pay less tax and NICs than they would otherwise.
The changes being introduced will fix the taxable value of most BiKs provided under salary sacrifice arrangements at the higher of the amount of cash forgone or the amount calculated under the existing BiK rules.
There are no changes to the tax and NICs advantages of salary sacrifice arrangements for:
- pension saving into a registered pension scheme
- employer provided pensions advice
- employer-supported childcare (including childcare vouchers)
- cycle to work schemes
- ultra-low Emission Cars (ULEVs)
Cars are considered to be ULEVs where they emit 75g CO2/km or less.
Employees and employers in existing contracts for BiKs under salary sacrifice arrangements will be protected for the length of that contract, subject to certain backstop dates.
The new measures will take effect for all new contracts for BiKs involving salary sacrifice arrangements entered into on or after 6th April 2017. Any employees already in a contract for BiKs at that date will become subject to the new rules in at the earlier of:
- an end, change, modification or renewal of the contract
- 6th April 2018, except for cars, accommodation and school fees when the last date is 6th April 2021
ULEVs will retain their current tax treatment and will not be subject to the new rules.
Employees are subject to deductions of Income Tax and Class 1 NICs on the full value of any cash payments received as earnings from an employment.
Any BiKs provided to an employee are taxed under separate regulations for benefits in kind. An employer pays Class 1A NICs on BiKs where there is a charge to tax but no Class 1 NICs are due. The total amount of Class 1A NICs due to be paid is calculated using the taxable value of the BiK.
Legislation is to be introduced in Finance Bill 2017 to introduce a rule to value all BiKs at the higher of the cash forgone or the current taxable value, with the exception of the benefits listed above.
Any existing contracts will continue to be reported and taxed under the pre-2017 rules until such time as the contract ends, is modified, changed or is renewed, or April 2018 at the latest. The April 2018 deadline is extended to April 2021 for cars, accommodation and school fees, presumably as the contracts for these BiKs may be longer-term contracts.
The emission level for exempt ULEVs may be updated in future, to be consistent with any changes to the treatment of these vehicles within the car benefit charge.
There will be no changes to the Class 1A NICs legislation as valuation rules for NICs purposes follow that of Income Tax.
There are no changes to the reporting of benefits provided under salary sacrifice arrangements for the 2016/2017 tax year, but if employers are providing benefits to employees under salary sacrifice arrangements they will need to familiarise themselves with the new rules.
If employees are only sacrificing salary for pensions, pensions advice, childcare vouchers, workplace nurseries, directly employer contracted childcare, cycle to work or cars with emissions of or under 75 g CO2 / km there is good news, in that you don’t need to do anything for now.
If an employee enters into a contract for any other benefit on or after 6th April 2017, then employers will need to immediately use the new rules for that employee. This will apply to new recruits.
From 6th April 2017, the trigger point to start using the new rules is when the salary sacrifice contract renews, auto-renews, starts, ends or is modified or changed. At this point, BiKs must be taxed under the new rules. If an existing contract is still in place on 6thApril 2018, then the new rules will be implemented from that point on, except for ULEVs, accommodation benefit and school fees where the new rules will start from 6th April 2021.
For the 2018/2019 tax year, HMRC will introduce new versions of the P46 (Car) and a new form P11D which will ask for details of any salary sacrificed to allow reporting of the extra information.
If an employer is voluntarily payrolling their benefits they will change one taxable value for another when a trigger point is reached. HMRC recognise that for cars this may be more difficult due to certain software constraints, but they will release further technical guidance in due course.
For the 2017/2018 tax year, HMRC is updating their software requirements for car data for those voluntarily payrolling benefits. These new requirements collect further information about the company cars, such as CO2 emissions and the list price.