HMRC has recently published a consultation document which sets out its proposals to tax benefits in kind provided through salary sacrifice schemes.
Salary sacrifice or ‘flexible benefit’ schemes have been big business as an attractive recruitment tool for large employers and the cost to the exchequer has been lamented by the government.
How do these schemes work? These work by offering employees benefits in kind that are tax free or subject to more favourable tax treatment than salary, in return for the employee giving up gross salary. This is a good idea as the employee would rather enjoy benefits tax free rather than paying for the benefits using taxed salary.
Example: Mary is an employee of Software Systems Ltd, paying income tax at the marginal rate of 40%. She is considering taking out a new personal mobile phone contract worth £400 per annum. Her employer suggested that the company instead enters into the mobile contract in return for Mary agreeing to give up £400 of her gross salary. Mary is happy as the net cost to her is just £232, being the reduction in her take home pay after taking into account income tax and NICs (£400 less 40% income tax and 2% NICs at marginal rates). She has therefore saved £168, as the provision of the mobile phone by her employer is a tax-free benefit. Also, Software Systems Ltd has saved employers’ national insurance of £55 (13.8% x £400) due to the salary reduction.
Which benefits will be affected and how? Subject to specific exceptions (below), the proposals will broadly catch those benefits for which salary has been sacrificed, including the provision of mobile phones, laptops, free car parking, health screening and sports facilities. Although health-related benefits provided for staff are generally exempt from tax, such as the provision of a work gym or health screenings, where such benefits have been valued for the purposes of sacrificing salary, they will be caught.
It is proposed that from 6 April 2017 all the tax advantages which are shown in our example will be reversed.
Exclusions: Some benefits will not be hit. The following will be excluded from the proposals, although this is no great comfort:
employer pension contributions;
employer provided pensions advice based on the financial advice market review recommendations;
childcare vouchers and workplace nurseries; and
cycles and safety equipment under the ‘cycle to work’ scheme.
Next steps: The consultation is open for comments until 19 October and so it is possible that proposals will be mitigated to some extent. If not it is likely that many salary sacrifice schemes will be knocked on the head with a corresponding tax hit to employees. It remains to be seen whether large firms will pick up the shortfall with salary step-ups.
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The proposals on salary sacrifice and BIKs
HMRC has recently published a consultation document which sets out its proposals to tax benefits in kind provided through salary sacrifice schemes.
Salary sacrifice or ‘flexible benefit’ schemes have been big business as an attractive recruitment tool for large employers and the cost to the exchequer has been lamented by the government.
How do these schemes work? These work by offering employees benefits in kind that are tax free or subject to more favourable tax treatment than salary, in return for the employee giving up gross salary. This is a good idea as the employee would rather enjoy benefits tax free rather than paying for the benefits using taxed salary.
Example: Mary is an employee of Software Systems Ltd, paying income tax at the marginal rate of 40%. She is considering taking out a new personal mobile phone contract worth £400 per annum. Her employer suggested that the company instead enters into the mobile contract in return for Mary agreeing to give up £400 of her gross salary. Mary is happy as the net cost to her is just £232, being the reduction in her take home pay after taking into account income tax and NICs (£400 less 40% income tax and 2% NICs at marginal rates). She has therefore saved £168, as the provision of the mobile phone by her employer is a tax-free benefit. Also, Software Systems Ltd has saved employers’ national insurance of £55 (13.8% x £400) due to the salary reduction.
Which benefits will be affected and how? Subject to specific exceptions (below), the proposals will broadly catch those benefits for which salary has been sacrificed, including the provision of mobile phones, laptops, free car parking, health screening and sports facilities. Although health-related benefits provided for staff are generally exempt from tax, such as the provision of a work gym or health screenings, where such benefits have been valued for the purposes of sacrificing salary, they will be caught.
It is proposed that from 6 April 2017 all the tax advantages which are shown in our example will be reversed.
Exclusions: Some benefits will not be hit. The following will be excluded from the proposals, although this is no great comfort:
employer pension contributions;
employer provided pensions advice based on the financial advice market review recommendations;
childcare vouchers and workplace nurseries; and
cycles and safety equipment under the ‘cycle to work’ scheme.
Next steps: The consultation is open for comments until 19 October and so it is possible that proposals will be mitigated to some extent. If not it is likely that many salary sacrifice schemes will be knocked on the head with a corresponding tax hit to employees. It remains to be seen whether large firms will pick up the shortfall with salary step-ups.
