Need to know:
- The changes to salary sacrifice arrangements limit the range of benefits that attract tax and employer national insurance contribution advantages.
- Organisations that reinvested these savings into funding their benefits strategy may have to look at alternative approaches.
- The legislative changes provide an opportunity for employers to review their employee benefits package, and ensure that they still meet the needs of their staff.
Chancellor Philip Hammond confirmed in 2016’s Autumn Statement that the tax treatment of salary sacrifice arrangements would be changing to limit the range of benefits that attract tax and employer national insurance contribution (NIC) savings when offered through a salary sacrifice scheme.
Effective from 6 April 2017, the legislation also affects arrangements where an employee is given a choice between a benefit in kind (BIK) cash allowance option, or flexible benefits schemes that have a cash option. Benefits that are affected by the legislation include technology purchase arrangements, health screenings, and gym membership discounts, among others.
Some benefits remain exempt from the changes. This includes childcare vouchers and employer-provided childcare, ultra-low emission vehicles (ULEVs), bikes-for-work schemes and associated equipment, contributions to registered pension schemes, and pensions advice.
Salary sacrifice has been redefined as type A or type B optional remuneration arrangements (Opra). Type A arrangements refer to schemes that enable staff to sacrifice an amount of taxable earnings in return for a benefit. Type B arrangements allow the employee to choose between a benefit or a cash allowance.
These legislative changes mean employers will need to take stock of their employee benefits package, and re-evaluate its value.
In transition
Transitional, or grandfathering, arrangements have been put in place so that schemes entered into before 6 April 2017 will not be subject to the tax changes until 6 April 2018. For car schemes involving vehicles that emit more than 75 CO2/km, living accommodation, and school fees, the transitional period continues until 6 April 2021.
Some employers are bypassing the transitional arrangements to introduce the changes early. Jeff Fox, principal at Aon Employee Benefits, says: "Some employers have decided that because the grandfathering is quite tricky to maintain, they're going to bring forward the tax changes. They're going to take the tax hit themselves by working with [HM Revenue and Customs] directly to settle any tax that might be due."
Finding funding
Some employers have used the savings generated through salary sacrifice arrangements to fund, or partially fund, aspects of their employee benefits offering. With this revenue now limited, those employers may be concerned about how to fund their benefits provision.
However, funding may not be as prominent an issue as first expected. Analysis on Aon Employee Benefits' portfolio of clients indicates that benefits that are exempt from the legislative changes are where employers spend the most money in salary sacrifice schemes, meaning that 90% of the tax savings that were available before the changes were implemented are still applicable, says Fox.
Employers who are faced with funding challenges as a result of the salary sacrifice changes have a few routes available to them. Employers could absorb the loss of their NIC savings, increasing their costs; redesign their benefits offering to pass any additional cost on to employees; or create some form of cost sharing arrangement with staff, explains Minh Tran, senior defined contribution (DC) consultant at Willis Towers Watson.
Alternative options
With fewer tax efficiencies available through Opra legislation, employers may wish to explore alternative routes in a bid to drive cost savings and provide employees with an appealing benefits package.
One alternative is to offer benefits on a net pay basis. Here, the cost of the benefit would be deducted from pay after tax and national insurance payments. A net pay scheme would result in less admin for employers too, says Julian Foster, managing director at Computershare. "There's no end of scheme or transfer of ownership administration," he adds.
Schemes that allow employees to finance a benefit over a set time period by contributing an amount from their net pay each month could also help them to spread the cost of products or benefits, such as technology products like iPads. Adam Mason, consultancy director at Benefex, says: “We’ll see benefits less reliant on tax saving as the primary driver for [employees] taking it, and actually financing being as much as a primary driver.”
Employers could also consider co-pay arrangements, where both the employee and the employer contribute towards the cost of the benefit, says Fox. While this could pose a communications challenge, it could help employers that can not afford to cover the cost of benefits themselves to avoid cutting back their benefits provision, he adds.
Some employers have made more benefits available on a core, funded basis. Mason says: “Where we've seen that more apparent is around [benefits] like life assurance and income protection where it isn't really seen as an option to take those away because they're so neatly entwined with the health and wellbeing of employees.” While the transitional arrangements are in place, some employers might remove the ability for employees to flex up from a core employer-funded benefit via a salary arrangement in a bid to counteract potential tax payments, adds Mason.
Because many employers already provide a core level of benefits, the removal of the salary sacrifice advantages available through flexing up is not expected to have a significant impact on funding, says Willis Towers Watson's Tran. "Effectively what we are talking about is the optional element where employees choose more and then they gain a saving from that, but we're not seeing any kind of radical reshape of benefits due to the loss of the employer NI from these arrangements," he adds.
Changing benefits landscape
In this climate of change, employers still have access to benefits that will not necessarily break the bank but will still hold appeal for employees, such as flexible-working arrangements and sabbatical leave.
One approach is to focus on intangible benefits and strengthening employees’ work-life balance through a benefits strategy rather than individual products. Jack Curzon, head of scheme design at Thomsons Online Benefits, says: “Alternative solutions need to be much more diverse, and they need to […] move away from that traditional approach of here’s a list of benefits […] that are very reactive. [Benefits] need to be proactive.”
To be proactive in this way, employers could facilitate benefits choice by providing employees with a set amount of benefit funding, giving them the freedom to source their own benefits. Curzon continues: “If [employers] give [staff] the funding towards benefits and let them go and source them themselves, then that's the win-win scenario. An employee gets an amount of money to spend on their health and if they want to do yoga instead of the gym, then they can go and do that. That means the list of benefits is no longer this rigid, inflexible list. It’s suddenly individual to a person.” Thomsons Online Benefits' Darwin portal, for example, features a spending account functionality that facilitates this.
However, this spending account or reimbursement manager type approach would be subject to tax. "That’s the only negative about it really; it’s a trade-off between having the funding, but it being taxable, to spend on literally anything that is personal and individual to exactly what the employee wants, [versus] a tax-efficient, shrinking list of inflexible schemes," says Curzon.
A communications challenge?
Using clear communications in plain English to inform staff of the legislative changes is vital, especially if employers are going to change how benefits are provided. Employers can still promote the advantages of salary sacrifice schemes, or Opra. The arrangements enable employees to gain from the employer’s scale to generate a better rate, and being part of a corporate plan makes administration simpler. Employees can also still benefit from employee NIC savings, with basic rate taxpayers generating a 12% saving, and higher rate taxpayers gaining a 2% saving.
Even without the tax and NI advantages, salary sacrifice schemes can still prove beneficial to employers in terms of employee engagement. Curzon says: "If [employers are] offering [a] policy that supports employees' health or makes them happier, that makes them work a bit more efficiently, makes them more motivated. Then it's ok that you might not get [an organisation] saving because you've got a better outcome for elsewhere."
Grandfathering arrangements have provided a minimum 12-month parachute for employers, however organisations should have a plan in place for an ongoing benefits strategy by the end of the summer, says Fox.
In one respect, the legislative changes provide a golden opportunity for employers to review their benefits offering, and analyse what benefits they are providing and why.
Viewpoint: Transparent staff communications are key in moving forward with salary sacrifice changes
The changes to the operation of salary sacrifice provisions seem to have been a long time in the making, however the broader review and subsequent wait for clarification still seemed to leave employers with a very quick turnaround. At the University of Lincoln, we always looked to use the efficiencies to support our operations, and the attraction and retention agendas. We also had full transparency with our workforce that the savings made in employer national insurance contributions (NIC) were reinvested into other benefit arrangements, offering a real incentive for employees to join; not only would they be benefitting from a tax-efficient benefit, but also any savings would be passed back in to the benefits programme.
The changes have led to a thorough review of our schemes. Car parking, which is now not a salary sacrifice scheme, continues as a net pay deduction but primarily because payroll still provides the best tool to make the collections from employees. It has also prompted us to revisit our pricing structure to see if further reductions in fees would be feasible to partly meet the loss of tax saving.
Our salary sacrifice training scheme also ceases to be compliant in its present format, however, we fully believe in providing benefits to support personal and professional development so this scheme will now become a development loan scheme and will operate very much like a season ticket loan scheme to support any employee wishing to self-fund any level of personal development and help spread the cost.
Our car scheme has had a change of focus, with more communications towards the greener cars that still carry tax-efficiencies, while still allowing other cars to be utilised. With our childcare voucher scheme, we are continuing to communicate that there is another option available for individuals through tax-free childcare, and we are continuing to encourage our employees to use the comparison tools out there to choose the option that is right for them.
Going forward we will be continuing to explore new options, such as shared cost additional voluntary contributions, as well as reminding employees that options such as payroll giving continue to be available.
In many ways, I am a little saddened to see that employers are taking decisions to cease offering benefits that for so long have proven beneficial to all. Personally, I think we will see an initial phase where the employee ultimately suffers from benefits no longer being made available, however, over time I think we will see a return to the more traditional flex model operating alongside more creative, local and connected benefits that will be developed to fill the void.
Ian Hodson is head of reward at the University of Lincoln
Viewpoint: Changes to salary sacrifice arrangements provides scope for benefits strategy innovation
Media coverage when the salary sacrifice changes were confirmed in Autumn 2016 tended to paint a gloomy picture, with attention-grabbing headlines often taking the focus away from the fact that many of the most popular salary sacrifice benefits, in the form of pension, childcare vouchers and bikes for work, are exempt.
This is, however, not to say that some employers have not faced challenges as a result, particularly where the affected benefits, such as company car schemes and private medical insurance, play more than a ‘bit part role’ in overall benefit offerings.
In these cases, from a practical perspective, one of the initial decisions to make at relatively short notice has been whether to continue to offer the affected benefits under an alternative guise, followed by other practical considerations such as how best to inform affected employees.
The impact on wider benefit strategies is another factor. In my opinion, where practical, organisations should use the inevitable disruption to take a step back to review their overall benefit strategy, to ensure alignment with the overall objectives of the business.
For example, at Countrywide, a benefits review conducted in 2015 highlighted employee brand advocacy as a key business objective, which led to a competitive discount offering on Countrywide property services being developed in-house. This includes free mortgage advice, over 80% off tenant admin fees, and at least 45% off conveyancing.
Another example was the need to increase the feeling of employee ownership with the organisation and shared goals, which resulted in a number of enhancements to the share incentive plan. Helping employees save money on day-to-day items has also driven targeted changes that have proven very popular with employees.
In summary, although the changes to salary sacrifice may not have had as big an impact as many originally perceived, I believe they are a reminder that benefits strategies need to be agile, responsive, innovative and continually reviewed. External factors such as the intensifying war for talent, the growing gig economy and the varying needs of generation X, Y and Z employees all play a key role, as does any ongoing nervousness of employers about any other future legislative changes that affect benefits.
Neil Goodwin is reward director, human resources at Countrywide
Viewpoint: Salary sacrifice legislation still needs to iron out anomalies before being finalised
The popularity of flexible benefits over the last twenty years has resulted in many employers implementing salary sacrifice schemes. The introduction of the new tax changes to such schemes, now referred to as optional remuneration arrangements, (Opra) has not only had a great impact on employers’ flexible benefit schemes, but they also represent some of the largest and most fundamental changes to the taxation of benefits-in-kind in recent times. It is estimated that they will impact over half a million company car drivers along with millions of employees who have participated in some type of salary sacrifice arrangement.
It is therefore disappointing that the guidance and the legislation for such major changes were distributed a mere 16 days prior to coming into effect. Indeed, most experts feel that the ‘final’ legislation still needs amendment to iron out some anomalies, in particular around the provision of life assurance as part of pension arrangements, which HM Revenue and Customs (HMRC) had stated would be excluded from the new rules in the final legislation.
Whether we see further changes in the legislation before it is finalised as an act, which is expected to be sometime in mid-summer, will be a case of wait and see. However, given the rush to make this law, it would not be surprising to see at least some amendments.
Graham Farquhar is employer solutions partner at accountancy professional services network RSM UK
Viewpoint: Car salary sacrifice arrangements can still offer choice
Amid all the hype around changes to car salary sacrifice scheme rules, one thing should be made clear; the primary reasons for employers promoting such employee benefits are unchanged.
The Institute of Car Fleet Management (ICFM) is aware of some employers taking a knee-jerk reaction to the legislation changes, such as abandoning schemes.
But it should be remembered that car salary sacrifice schemes, however the tax changes are viewed, continue to offer benefits to both employers and employees.
Car salary sacrifice schemes still work to the benefit of both employers and employees, especially if cars are carefully selected with the focus on ultra-low emission vehicles (ULEVs).
With car salary sacrifice rules entered into before 6 April 2017 protected until April 2021, a ‘hotspot’ will be when renewals are due. It may be that the choice of car made previously is not the right option under the new rules.
Therefore, while businesses must consider the impact of the changes, taking into consideration the employer’s position on CO2 limits and available cars, there are many cars that are largely unaffected. Others will perhaps become more attractive, such as ULEVs, and some will become less attractive, for example low-emission, low-value cars above 75g/km are impacted the most. But that does not mean the destruction of choice lists. Employer communication with employees is crucial along with careful consideration of the impact of the new rules on available vehicles and some maths.
Where vehicle choice is available, employees should be able to find cars that represent ‘good value’, and while the new rules may signal a change of selection patterns and different vehicles becoming popular, many employers may well find that, when they look at the impact, a healthy vehicle choice remains.
Peter Eldridge is director at the Institute of Car Fleet Management (ICFM)
Case study: University of Lincoln switches to net pay deduction schemes to fill salary sacrifice gap
The University of Lincoln has introduced net pay deduction schemes to replace benefits that were previously offered on a salary sacrifice basis, but are now caught under optional remuneration arrangement (Opra) legislation.
The university, which employs 1,700 core staff and 1,500 claims workers, previously re-invested the employer national insurance contribution (NIC) savings that were available through salary sacrifice schemes into other benefits arrangements, using this mechanism as a key benefits funding tool. Since the Opra legislation became affective in April 2017, the university has had to brainstorm other ways to offer benefits to staff. This brainstorming commenced with a benefits review in January 2017.
Ian Hodson, head of reward at the University of Lincoln, says: “We know that this is going to be a diminishing pot of NI savings. We are looking at other things such as pensions salary sacrifice and shared cost [additional voluntary contributions], which we know can still form part of the salary sacrifice package, so we’re looking at whether we can offer those now to replace those national insurance savings. That’s where we’ll go in the future now.”
For many of the education organisation’s salary sacrifice schemes, net pay deduction arrangements have been implemented as a replacement. This includes car parking, which is grandfathered until 2018 before falling under Opra legislation. Hodson adds: “From an employer point of view, it’s a bit confusing because we’re running two different schemes; one that’s closed to new entrants and will run until next year, but then one for new entrants where you’re having to sell a different set of benefits. […] We just have to re-think what we’re really offering as a benefit.”
The university’s salary sacrifice training scheme has also undergone changes to be re-launched in April 2017 as a net pay deduction scheme designed to offer employees a loan, in a similar way to a season ticket loan, so that staff can attend educational courses or classes for their personal or professional development.
Hodson also notes that the university has devised two separate communications plans around its car scheme. One strategy focuses around the green cars with less than 75g of CO2 emissions that are exempt from the Opra legislation, promoting the tax-efficiencies that are still available, while the second communications plan highlights a net pay deduction arrangement that can still be utilised for higher emission, larger cars that are subject to the legislation. “What we’ve been doing is really making sure there isn’t a negative message going out,” Hodson explains.