If you have made use of salary sacrifice arrangements in connection with the provision of benefits, you will be aware that they enable employees to pay less tax and NIC’s than if they had been remunerated entirely in cash. In addition, employers may achieve employer NIC savings. But the optional remuneration arrangements are changing under new legislation.
In the eyes of HM Treasury, the cost of the tax and NIC savings made via these arrangements represent an exchequer cost carried by a majority of taxpayers. Therefore, from 6 April 2017 the Government introduced legislation to reduce the tax and NIC advantages provided through salary sacrifice arrangements.
Unfortunately, the legislation is broader than people expected and catches optional remuneration arrangements as well as salary sacrifice arrangements. In this regard, the legislation targets two types of arrangements called ‘Type A’ and ‘Type B’ arrangements:
- Type A: Covers arrangements under which the employee gives up the right (or a future right) to receive an amount of earnings in return for a benefit.
- Type B: Covers arrangements in which the employee agrees to be provided with a benefit instead of an amount of earnings.
In either of these arrangements, the employee will be taxed on the ‘amount forgone’, which refers to the amount of earnings given up in order to receive a benefit. More specifically, an employee will always be taxed on the higher of ‘the existing taxable value of benefit’ or ‘the salary forgone’.
Take the following example: An employee is given the option to take a car cash allowance of £5,000 or a company car with a taxable value of £4,000. The employee opts for the company car. Under the new rules the employee will be subject to tax and NIC on the higher value being £5,000.
As it currently stands the new rules do not apply to certain benefits. Those left unaffected by the new rules include employer pension scheme contributions, employer provided pension advice, employer provided childcare, cycle to work schemes, ultra-low emission vehicles (vehicles that emit CO₂ 75g/km or less), as well as benefits relating to the termination of employment.
Grandfathering provisions will ensure that arrangements in place before 6 April 2017 will be protected until 6 April 2018 provided there are no variations or renewals before then. Arrangements involving cars, vans, fuel, living accommodation and school fees will be protected until 6 April 2021 provided there are no variations or renewals before then.
Employers will need to urgently review their employee benefit position to see whether they are affected by these ‘optional remuneration’ provisions.
For more information regarding these changes and how they may affect the provision of benefits to employee, book a free consultation