Salary Sacrifice and Employee Benefits
Written by: Philip Thrush
The Autumn Budget statement announced that there would be changes to the taxation of benefits provided to employees via Salary Sacrifice/Exchange. This will reduce the tax efficiency of benefit programmes for new arrangements from 2017 and existing plans from 2018.
This had been widely anticipated as HMRC declared it wanted to curb the savings made by employees and business through the flexible and voluntary benefit platforms. Many of the headlines after the budget proclaimed the decline in the effectiveness and tax efficiency of benefits but what does it mean in real terms?
The current situation
Many benefits are offered to employees through a flexible benefit platform and employees are able to sacrifice part of their salary to purchase a wide variety of benefits that would otherwise be purchased from net pay.
Although paid for from gross salary and receive the benefit of saving both Tax and National Insurance immediately, most of these benefits are then retrospectively taxed via either P11d or “payroling” of benefits but did still save the National Insurance on the sacrifice. Certain benefits are exempted from the tax charge such as Pension Contributions, Health Assessments, Childcare Vouchers and Cycle to Work and low emission cars. The Government has declared that this will remain the case moving forward.
Having been taxed, the only benefit currently received by way of salary sacrifice is the saving in Employee & Employer National Insurance. For the employee this is either 12% or 2% and for the employer, 13.8%.
|Benefit selected||annual gross cost||
Lower NI bracket
|Higher NI bracket
Current NI saving
cover level 4
Cash Plan level 3
Note: current Employee NI bands (2016/17 tax year)
£0-£8,060 p.a. = 0% NI
£8,061-£43,004 p.a. = 12% NI
£43,005+ = 2% NI
Based on the figures above it is evident that for the 40/45% tax bracket, the impact is relatively small but for a basic rate tax payer there is a more substantial increase in cost for purchasing benefits compared to the current arrangement.
For Businesses, there is a flat 13.8% increase in base cost as there is no longer going to be a saving when members purchase via salary sacrifice. In the case above, the company will lose the savings and this equates to £186.30 per annum. Depending on the numbers of employees engaging with the benefit offering, this could be a substantial reduction in revenue. This will no doubt impact on the available budget for company sponsored benefits as the savings employers make will reduce.
In addition, employers that offer voluntary benefits will need to adjust their systems to account for the change from gross to net pay and communicate this to their employees.
When does the change take place?
The budget statement noted that benefits in place as at April 2017 will continue under the current salary sacrifice arrangement but will then have tax & NI levied from April 2018. Existing salary sacrifice car arrangements will be protected until 2021.
At this time, many employers offering flexible benefit programmes will look to change the payment deduction to net pay rather than gross salary sacrifice as there will be no financial gain in continuing with the latter.
The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Occupational pension schemes are regulated by The Pensions Regulator.