Last week HMRC issued a consultation on limiting the range of employee ‘Benefits in Kind’ (BiK) that attract income tax and national insurance contribution (NICs) advantages when provided as part of salary sacrifice arrangements.
Salary sacrifice arrangements normally involve an employee sacrificing part of their salary in return for a form of non-cash BiK. Once that salary is given up, it is not chargeable to income tax, nor is it liable for NIC’s. However, under the proposed changes, BiK’s provided through salary sacrifice will now be chargeable to income tax and Class 1A employer NIC’s, at the greater of:
- The amount of salary sacrificed; and
- The cash equivalent set out in statute (if any).
The purpose of the consultation is to ‘explore potential impacts on employers and employees should the government decide to change the way the benefits code applies when a BiK is provided in conjunction with a salary sacrifice or flexible benefit scheme’. However, the proposed measures are limited in scope and do not extend to employer pension contributions, employer-provided pension advice, employer-supported childcare, provision of workplace nurseries, and cycles and cyclist’s safety equipment provided under the cycle to work scheme. Salary exchanged for intangible benefits, such as flexible working or additional holiday entitlement, and payroll giving will also be unaffected.
It is also worth noting that the government’s intention is not to prevent employers from providing BiK’s through salary sacrifice, merely to remove the tax and NICs advantages of doing so. Should the potential measures go ahead, employers will still be able to use salary sacrifice if they wish to do so, and any BiK’s offered outside of a salary sacrifice arrangement will remain unaffected.
HMRC is also consulting on proposals to align the dates by which an employee has to “make good” the cost of their BiK. The current rules surrounding this are unnecessarily complex as there are a number of different dates set out in HMRC guidance and legislation. There are also some practical difficulties in adhering to some of the dates. The government is therefore proposing a ‘simpler and clearer system’ and seeking the public’s views in this regard.
Although it may be some time before the government issues a response, employers with salary sacrifice arrangements and flexible benefit packages may want to revisit these, consider how these changes will affect them, and communicate with their employees the likely impact on their take-home pay.
You can view the consultation document on salary sacrifice here, and the consultation for the alignment of dates here. Both consultations close on 19 October 2016 are open to a wide range of stakeholders and interested parties to respond.
The government also published responses to its 2015 consultation on simplifying tax and NICs on termination payments, together with draft legislation for further consultation.
At the end of any employment, there are often various payments due to the individual. Most of these form part of the employer’s contractual liability and are therefore subject to tax and NICs, just like one’s salary. However, the current position on tax for other elements is less clear. In 2014, the Office of Tax Simplification issued a final report on termination payments and concluded that the current system is fraught with confusion and uncertainty.
The consultation proposes that, from April 2018, the government will introduce the following measures:
- All payments in lieu of notice (both contractual and non-contractual) will be taxable earnings and subject to income tax and NICs. Thus, the distinction between contractual and discretionary PILONs is removed.
- All other termination payments (which would have been subject to tax and NICs had an employee worked their notice) will also be treated as taxable earnings.
- The rules for income tax and employer NICs will be aligned, in order that payments over £30,000 will attract NICs.
- Non-contractual termination payments will be exempt from tax and NICs up to the amount of £30,000
It also appears that the government have borne into consideration the responses to the original consultation, as a number of the proposals (e.g. the variable threshold for the exemption based on length of service, and the removal of the exemption for legal costs) have been dropped. These would have made the rules on termination payments unnecessarily complicated. It is hoped that these proposals will help to clear the confusion surrounding the taxation of termination payments, and provide increased certainty to employers.
You can view the government’s response to the consultation here, together with the proposed legislation. The consultation closes on 5 October 2016.
Devonshires Solicitors LLP actively monitor the latest developments in government law reform on a variety of subjects. For any further updates about these two consultations, please view our Employment blog at www.devonshiresemployment.com or contact your usual member of the team.