SALARY SACRIFICE – ARE YOU UP TO DATE?
If you provide benefits to your employees through salary sacrifice or flexible benefits packages then you must read on……
Salary sacrifice schemes have been popular with both employers and employees for several years. Basically, an employee gives up salary and receives benefits of equal value in exchange. By receiving benefits instead of salary, both employer and employee save tax and/or National Insurance (NIC).
HMRC are increasingly concerned that these schemes have been over used and that there is a loss of tax and NIC to the Exchequer as a result. Therefore, the rules have changed.
Salary sacrifice schemes have been absorbed into a new regime called Optional Remuneration Arrangements (OpRAs) and, as a result, income tax and NIC savings are greatly reduced.
What are OpRAs?
OpRAs are arrangements under which either an employee is provided with, or chooses, a benefit in return for giving something up. The rules for OpRAs will therefore impact on salary sacrifice schemes and flexible benefit packages under which employees choose from a menu of benefits or a cash alternative.
Where a benefit is provided under an OpRA, the value of the benefit to be treated as earnings for tax and NIC purposes is the greater of:
- The amount of salary given up by the employee in return for the benefit; and
- The taxable benefit calculated under the normal benefit in kind rules, ignoring any amount made good by the employee.
For example:
- An employee gives up £1,000 of salary for benefits that are valued at £900. The higher value of £1,000 is used for tax and NIC purposes.
- An employee choses between a pay rise of £2,000 and a car (which is not a low emission vehicle) where the cash equivalent of the car is £2,200. The higher value of £2,200 is used.
When do the new rules apply?
After April 2017, the new rules are triggered when a salary sacrifice arrangement starts, is renewed, or is modified.
Employees whose salary sacrifice arrangements were in place before 6 April 2017 will be subject to the new rules from 6 April 2018. However, if the benefit is a car with emissions of more than 75g/km, living accommodation or school fees, these are protected until the earlier of variation, renewal or modification of the arrangement, or 6 April 2021.
Excluded benefits
Some benefits are not affected by the new rules, including:
- Payments into pension schemes;
- Employer provided pension advice;
- Child care vouchers, workplace nurseries and employer contracted childcare;
- Cycle to work scheme;
- Cars with Co2 emissions of 75g/km or less;
- Subsidised meals;
- Reimbursed expenses; and
- Trivial benefits.
If a benefit is provided by an employer and there is no salary sacrifice and no arrangement to choose a benefit rather than cash, then the new rules do not apply. In these cases, the existing benefit in kind rules apply.
What is the difference for employees?
Employees will face increased income tax liabilities.
Using the first example above, the higher value of £1,000 must be treated as additional salary and subject to income tax through payroll.
Depending on the level of salary, there will be a tax cost, spread over the year, to the employee of £200 if the employee is a basic rate taxpayer, £400 if a higher rate taxpayer and £450 if an additional rate taxpayer.
What is the difference for employers?
Employers will face increased NIC liabilities.
Although employers will not need to prepare a P11D for affected employees, they do need to report OpRAs on the end of year benefits declaration form P11D(b) to calculate and pay Class 1A National Insurance, currently 13.8%, over to HMRC. The P11D(b) must be submitted to HMRC by 6 July following the end of the tax year and the employer’s NIC liability (£138 in the above example) paid by 19 July.
Employers will need to make sure that these new rules are communicated to employees so that both sides can make informed judgements about whether such remuneration schemes still make sense.