The Autumn Statement had three tax announcements relevant for HR and employment specialists.
The Government has announced its final proposals on salary sacrifice following consultation this year.
From April 2017, new benefits in kind provided as part of salary sacrifice arrangements will be subject to income tax and NICs as if they were paid as salary, thus removing the tax and NICs benefits of many benefit packages. A number of arrangements will not be caught, however, and arrangements already in place will be protected from the new rules.
What had underpinned many salary sacrifice arrangements was that most benefits are exempt from employee's NICs and many also have favourable employer's NICs and tax treatment. It was therefore efficient for employees and employers to agree to "swap" fully taxable and NICable salary for benefits with favourable treatment and for either the employee or employer to benefit from the tax and NIC savings.
That will now change, although exempt from the new rules taking effect from April 2017 will be pension arrangements, pensions advice, cycle to work schemes and (an extra item added following consultation) ultra low emission cars which can continue to be provided under arrangements where tax and NIC savings are available. However, salary sacrifice arrangements for car parking, mobile phones, gym membership and many other benefits can no longer be provided tax and NIC efficiently by salary sacrifice arrangements and so they may as well be provided out of after-tax salary.
There will be relief though that the Government has listened to representations and will not apply the new rules to arrangements put in place before April 2017 (they will be protected for a year), which still gives employers time to put in proposed arrangements for next year. The Government will also give protection until April 2021 for arrangements put in place for cars, accommodation and school fees.
Companies putting in place annual benefits programmes during the HMRC consultation period preceding this announcement have faced extremely difficult decisions as to how to go ahead with their 2017 programmes as they have had to offer them not knowing what the true cost would be from April 2017 (part way through the benefit year). Now, at least they can proceed with their 2017 offerings confident that the tax and NIC treatment will not change mid-year, although 2018 and post-April 17 offerings will need to be rethought. It is likely that some employers may stop offering these schemes as the NIC savings are used to cover the cost of them.
Click here to see our earlier Law-Now on this which sets out many of the relevant issues.
The Government has also announced final proposals on termination payments, following two consultations.
The final proposals are much simpler than were proposed earlier this year. They will take effect in April 2018 (so one year after the salary sacrifice changes which take effect in April 2017). Essentially the current regime will remain in place, which distinguishes between on the one hand amounts taxable and subject to NICs in full and on the other amounts which are capable of favourable treatment (such as unfair dismissal and redundancy payments, or payments which represent damages for breach of contract). These are normally tax-free as to the first £30,000 of the amount and are completely free of NICs. There will be two changes to the favourable regime:
- First, any payments above £30,000 in the favourable regime will, after April 2018, become subject to employer’s (but not employee’s) NICs. This will be a cost to employers, although indirectly may lead to lower packages when employers take the overall cost into account.
- Secondly, where a termination payment in the favourable regime includes pay in lieu of salary (or strictly speaking in lieu of basic pay, which is relevant where overtime etc. is routinely paid) and which would have been paid in a notice period, that amount of the termination payment will automatically be subject to tax and NICs in full. However, the key point here is that it seems that more complicated proposals have been dropped. These would have been treated as fully taxable any amounts in a termination payment representing not just salary but also bonuses which would have been expected to be paid in the notice period (which gave rise to all sorts of assumptions needing to be made and valuations performed).
No announcement has been made about bringing in legislation to make clear that damages for injury to feelings are within the termination payments tax net (albeit in the tax favourable regime) or the removal of foreign service relief, which were also referred to in the final consultation document.
Click here to see our Law-Now on the earlier proposals.
Employee shareholder shares
Although employee shareholder shares or ESS arrangements already in place will keep their favourable tax treatment (at least for the moment), the ability to offer ESS arrangements going forward has been withdrawn with almost immediate effect.
ESS arrangements gave an employee at least £2,000 of free shares (which are tax and NIC free on award), although up to a further £48,000 of shares could be awarded with income tax and NICs arising on award. On sale, gains on shares awarded before March 2016 any gain above £100,000 is taxable as normal to capital gains tax.
These arrangements, designed for broad employee appeal, quickly became used predominantly in executive arrangements in private companies often with geared growth arrangements. This meant that £2,000 of shares on award could be worth many times more on a successful exit and yet be sold completely free of capital gains tax.
Their demise in the current environment is therefore not surprising, although if independent advice has already been received on the arrangements, there is still a limited opportunity to put arrangements in place.