The future of salary sacrifice after HMRC consultation

Recently there has been much speculation that the government was concerned about – and intended to change – the rules that allow many employee benefits to be provided via a mechanism known as salary sacrifice.

The reason for this focus is that the number of salary sacrifice schemes operated in the UK has rocketed in recent years, with a resultant loss of income tax and national insurance contributions to the exchequer. There are also concerns that the practice in unfair, as many employees paid on or just above the legal minimum wage level are unable to utilise the salary sacrifice mechanism.

So change in this space is not unexpected, and this came one step closer recently with the publication of a document by HMRC entitled Consultation on salary sacrifice for the provision of benefits in kind.

The above document builds directly on the previous Chancellor of the Exchequers’ Budget statements over the last couple of years, and in particular the April 2016 Budget document announcement.

So what does the latest document tell us, and what does this mean for employers?

First, and importantly, the document tells us which benefits are effectively out of scope for any proposed changes: “The government stated its intention to exclude a number of Benefits in Kind (BIK) from the policy because it wishes to encourage employers to provide these to employees.  Therefore, views are not being sought on the following: employer pension contributions; employer-provided pension advice based on the recommendations of the Financial Advice Market Review (FAMR); employer supported childcare and provision of workplace nurseries; [and] cycles and cyclist’s safety equipment which meet the statutory conditions.”

Some of our more sharp-eyed followers may note a change even in the above listing. It was originally proposed that all “health-related” benefits would be excluded from any proposed change, but as the document later goes on to say: “The government has carefully considered the case for carving out other health related BiKs from the change but has ruled this out.”

Yet even this change of direction is caveated, as the document goes on to confirm that some health-related exemptions are already in place, and that there will be no impact on most payroll giving, flexible working or purchasing additional annual leave.

The bottom line is that the range of benefits that may be impacted by any actual change is rather niche, and therefore many employers will not be troubled by these proposed changes. Richard McKinley-Price of Jelf said: “No figures have been published by the government as to the expected saving for the exchequer, but I do wonder whether they’ll actually add up to anything particularly substantial. The consultation document sets out that employer pension contributions, childcare vouchers – these have a limited lifetime anyway – bikes and the buying of holiday are all out of scope and these are the benefits operated via salary sacrifice that generate the vast majority of savings. What is left are computers, mobile phones, health screenings, cars, and car parking. The availability and take-up of these benefits is typically far lower and for some of these, such as cars and computers, there is only a partial saving for the employee and employer.”

That said, there will be many employers who do face some real challenges from this policy alteration by HMRC, and given that the intention to introduce any changes to the current situation remains targeted at April 2017, there may not be much time to plan an effective response.

What should employers do
First, it is worth taking a good look at the consultation document and responding if you think you have a valid or additional point to make. The proposed changes remain a work in progress so such submissions may still have some bearing on the final outcomes. The consultation remains open until 19 October 2016.

Second – and for most more importantly – Jelf would encourage all employers to review their current benefits offerings to see where any problems may arise as a result of any final changes.  McKinley-Price added: “Regardless of how the changes are finally implemented by the government, the key for employers will be to communicate that effectively to employees and to maintain access to a broad range of benefits that support their employees.”