Need to know:
- Salary sacrifice arrangements are currently under review by the government
- Such arrangements can be costly for government in terms of tax revenues but create valued tax savings for employers and staff.
- Organisations and workers could be demotivated if the government removed salary sacrifice arrangements all together.
Find out more about all the latest developments impacting reward and benefits at Employee Benefits Live 2016 on 11-12 October at Olympia National, London
In the policy paper that was released following Chancellor George Osborne’s Autumn Statement and Spending Review on 25 November 2015, the government outlined that it will continue to consider what action will be taken around salary sacrifice arrangements. In the Spending review and autumn statement 2015 policy paper, the government expressed its concern at the growth of salary sacrifice arrangements, echoing the sentiments expressed in the Summer Budget 2015 when the government stated it would actively monitor salary sacrifice arrangements and their impact on tax.
This raises the question as to what employers’ options would be if the government was to alter the way it operated salary sacrifice schemes, or even removed them altogether. Julian Foster, managing director at Computershare, explains: “The government must weigh the cost that comes from reductions in tax revenues against the value that salary sacrifice schemes offer to employers and employees. It’s important that employers and providers work together to ensure that schemes are not abused and continue to represent good value.”
Car salary sacrifice schemes are a prime example of popular tax-efficient arrangements among employers and employees. Alison Argall, business development director at Tusker, says: “Employees’ average monthly saving is £80 on vehicle costs and £50 in fuel, and it’s a fixed cost so the employee will know exactly how much they’re spending each month making budgeting easier.”
In fact, 92% of teacher respondents said they would consider taking up a car via a salary sacrifice arrangement if they were offered it as a benefit, according to a study by Tusker published in November 2015.
In October 2015, Danone reported an 82% engagement rate with emails communicating its salary sacrifice car scheme following its introduction in September 2015. The organisation also saw 140 active users in the system and more than 50 quotes saved in the two weeks immediately following the launch.
Such take-up reflects employees’ appetite for accessing tax-efficient benefits such as car schemes through salary sacrifice arrangements. Removing the method therefore could cause employees to become seriously disengaged with their employer and their benefits package. Kim Honess, head of flexible benefits consulting at Willis Towers Watson, explains: “These benefits are the cherry on top of the icing; taking them away would disengage so many.”
Jo Dalby, finance director at Busy Bees Benefits, adds: “It’d be very difficult for employees who are using and enjoying a scheme to suddenly have it taken away.”
Some salary sacrifice arrangements can bring additional benefits, as well as create tax savings. “Salary sacrifice benefits such as bikes-for-work schemes can boost employee health and form part of an organisation’s green agenda,” says Honess.
Impact on reward strategies
If the government was to remove tax-efficient benefits from the reward space, it would not only mean removing employees’ available tax savings, but also savings on national insurance contributions (NICs) for both the employee and employer.
This would also mean that organisations would have to adapt reward packages to suit any new arrangements in order to attract and retain staff. Dalby explains: “If the government did get rid of salary sacrifice, employers would be forced to change their benefits packages.
“Savings for employers from salary sacrifice [arrangements] mean they’re more likely to put effort into promoting it, so why would the government take that away?”
Dalby adds that cars, bikes-for-work and pensions arrangements would be particularly difficult to get rid of because of the wealth of communication the government has done to emphasise the importance of saving for retirement and greener travel. As Computershare’s Foster says: “Reductions in salary sacrifice schemes by government would be detrimental. Without the tax incentive it’s likely [employees’] options would be less far less comprehensive.”
Overall, the industry has mixed views on the future of salary sacrifice arrangements. For example, Alastair Kendrick, director at accounting firm MacIntyre Hudson, believes it is likely that the government could scrap these because they are expensive to implement. “It would be an easy option to get rid of salary sacrifice schemes,” he says.
However, Willis Towers Watson’s Honess says it was a positive step for the government to express concern at the growth of salary sacrifice arrangements because staff could actually be overusing it due to how much tax they can save. “Salary sacrifice could become a victim of its own success, just like the M25,” she says. “Staff can overuse it because it’s so beneficial for them, not so much so for the government because of the lack of NI.”
She adds that tax-efficient benefits can actively mould employees’ behaviour, so, motivationally speaking, it would be counterproductive for the government to remove the salary sacrifice arrangements. For example, research by the Cycle to Work Alliance published in December 2015 found that almost two-thirds (60%) of employee respondents believe cycling to work improves their productivity.
While the future of salary sacrifice arrangements is unclear, the value these bring to both employers and employees cannot be disputed.
Viewpoint: Salary sacrifice can benefit both employer and employee
Salary sacrifice arrangements are very simple, highly effective and potentially beneficial to both employee and employer. It is almost too good to be true.
At the heart of a salary sacrifice arrangement is an agreement between an employer and an employee to change the terms of the employment contract to reduce the employee’s entitlement to cash pay. This sacrifice of cash entitlement is usually made in return for some form of non-cash benefit such as more holidays, a better car or enhanced health insurance.
Salary sacrifice can be financially beneficial for both employer and employee. For example, when part of an employee’s remuneration shifts from cash, on which tax and national insurance contributions (NICs) are due, to non-cash benefits that are wholly or partially exempt from NICs, both sides can be better off.
While simple in principle, and capable of being changed, suitable documentation is required. If an employee wants to opt in or out of a salary sacrifice arrangement, their employer must alter their contract with each change. Employees’ contracts must be clear on what their cash and non-cash entitlements are and, once the entitlements are clear, it is the employer’s responsibility to make sure that they pay and deduct the right amount of tax and NICs for cash and benefits.
Following the significant increase in salary sacrifice arrangements over the years, the government is becoming concerned about the potential loss of NICs. Concerns were raised in the Summer Budget, and the government announced in the Autumn Statement 2015 that it was launching consultation among employers, which seems likely to form part of a wider evidence-gathering process on the use of salary sacrifice.
At present, there is no clear indication as to which way the Treasury is likely to move. With the prospect that income tax and NIC maybe harmonised in the foreseeable future, it is unlikely that Her Majesty’s Revenue and Customs (HMRC) will remove any of the tax advantages from salary sacrifice.
However, HMRC is almost certain to take a tougher approach to ensuring that every detail of salary sacrifice schemes is implemented correctly, whether or not the harmonisation of income tax and NIC actually happens. Employer failures in implementation may mean that what looks too good to be true is proved by HMRC to be just that.
George Bull is senior tax partner at RSM UK Tax and Accounting
Peel Ports uses salary sacrifice arrangements to support staff
Peel Ports Group offers its 1,000 employees several benefits via salary sacrifice to support them in both their work and personal lives. These include its contributions to its stakeholder pension scheme and childcare vouchers.
Its most popular benefits offered on a tax-efficient basis are pension contributions, which 90% of its workforce takes up; its iPad salary sacrifice scheme, which 10% use; and its childcare voucher scheme, which 4% of its staff have taken up.
Howard Sloane, HR director at Peel Ports, believes that the government simply may not be able to afford to not dispose of the schemes. “Salary sacrifice has a much wider benefit to the economy in areas such as encouraging people to save, supporting working people with childcare and reducing carbon footprint,” he says.
“Without salary sacrifice, the amount payable to pension schemes could be affected, which would affect employee’s retirement plans. This knock-on effect would have UK-wide implications. In addition, the complexity and costs associated with unravelling salary sacrifice would not be insignificant.”