In the Autumn Statement, the Government confirmed that it would remove the tax advantages of salary sacrifice for arrangements put in place after April 2017. Certain benefits provided through salary sacrifice (accommodation, cars and school fees) would be protected until 2021 and other benefits can still benefit from tax savings indefinitely (pensions, cycles, childcare, certain financial advice and ultra low emission cars).
The Government has now published the draft legislation for the salary sacrifice arrangements it is targeting (or “optional remuneration arrangements” as the legislation refers to them). Rather than a sweep-up approach to dealing with all arrangements in a similar way, it has chosen to include separate charging provisions for all sacrificed benefits. Generally they will all be taxed in the same way: where an employee has a choice of cash or benefit, if the benefit in kind is taken it will be taxable by reference to the amount of cash which could have been received or the cost of the benefit, whichever is the higher.
However, the legislation makes clear that even though the taxable amount will often be the salary that was given up, the benefit will not be taxed as salary. It will still be taxed as a benefit in kind and as such will not be subject to employee’s NICs or subject to PAYE as it will still be reported on the P11D (though employers will just report the special taxable value of the benefit rather than separately identifying it as a salary-sacrificed benefit).
Although the legislation generally reflects what was announced at Autumn Statement, some key questions remain and at least one new point has emerged:
- Often when a senior employee joins he is given a choice as to whether he wants certain benefits or cash instead. This occurs before a formal offer is made. Will these be arrangements caught by the new rules? There is no choice as such in that there is no formal offer by the employer – these should be seen as merely discussions.
- Pre-April 2017 arrangements are only protected if they are not varied or renewed after that date (with just one exception where a car is replaced after an accident). That is broadly understandable, but there seems to be no de minimis threshold. Say healthcare cover had been bought through salary sacrifice and mid-year a newborn child is added to the cover. Would that be enough to cause the arrangement to lose its protection?
- Surprisingly, loans are caught. This has not been flagged previously. The effect of the new legislation is that where an employee could have received an outright cash payment or a loan, the loan will be treated as a benefit in kind, taxable not just on the notional annual interest, but on the full amount advanced. Some employers in the financial services sector have offered loans to hires in the form of forgivable loans which are in effect bonuses which may have to be repaid, and in many private companies loans are made to directors which are then repaid out of bonuses or salary paid later on. It is hoped that HMRC will offer comfort that these flexible arrangements are not caught by the new legislation, though existing arrangements may be protected until 2021.
The relevant draft legislation (Schedule 2 of the Finance Bill 2017) and HMRC explanatory notes can be accessed here.