What do salary sacrifice changes mean for group risk benefits?

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Ellipse explores how the changes to salary sacrifice will impact group risk benefits, employers and financial advisers, suggesting ways both parties can prepare for the impact on flexible and voluntary benefit arrangements.

Salary sacrifice has been used by employees to purchase certain benefits in a way that saves income tax and National Insurance contributions for both them and their employer.

However, with changes to salary sacrifice looming, many benefits, including ones that can provide financial protection, will lose these tax and National Insurance contributions savings, resulting in increased costs for both employees and employers.

From 6 April 2017 the government will legislate in Finance Bill 2017 to remove the income tax and National Insurance contribution advantages of some salary sacrifice benefits, impacting flexible and voluntary benefit schemes where employees pay for the benefits via salary sacrifice.

It was announced that any benefit paid for by salary sacrifice would be affected, with the exception of  contributions to a registered pension scheme, employer funded pension advice, childcare vouchers, cycle-to-work schemes and ultra-low emission cars of 75g CO2/km or less. These benefits can continue as they do currently.

So what do these changes to salary sacrifice mean for group risk and protection benefits?

The good news is registered group life, because it is considered to be a registered pension scheme, will be exempt from the changes to salary sacrifice. Also, there will be no changes to critical illness insurance as this product is already a benefit-in-kind for employees.

However, any group life cover provided outside a registered arrangement, for example an excepted life scheme, will not benefit from the exemption and will therefore be subject to the new rules on salary sacrifice.

As for group income protection, benefits are usually paid to the employer who passes it on to the employee through the PAYE system, deducting income tax and National Insurance contributions in the normal way.  The bad news here is that the premium an employee pays for their group income protection arranged through salary sacrifice flex and voluntary agreements, will now be subject to income tax and National Insurance contributions as well.

What does this mean for employers?
Where employers have benefits, such as group income protection and excepted group life, set up via a flexible or voluntary arrangement that will be impacted by the changes, they will need to make arrangements to stay within the new laws following 6 April 2017.

However, the changes will impact employers at different dates, depending on when their employee’s salary sacrifice contract starts, renews or is modified. These dates will be known as trigger points; the point at which benefits will be subject to the new rules on salary sacrifice.

At an employee level, trigger points will usually occur when they chose their benefits during their flexible or voluntary selection window. However, if an employee does not start or modify a salary sacrifice contract before 6 April 2018, this date will become the trigger point for their benefit.

For new employees starting on or after 6 April 2017, employers will need to use the new rules for that employee as soon as they join the business as this is a new contract.

Practical changes for employers
Employers will need to make changes to their flexible and voluntary platforms in order to reflect the changes. This may include providing an explanation text box for benefits such as excepted group life and group income protection, to give employees as much information as possible about how the income tax and National Insurance treatment of these benefits has changed.

Furthermore, employers will need to change the way they calculate National Insurance contributions and income tax, which may include working with their IT and payroll providers.

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Keeping employees in the loop
The question is, do employers have a moral obligation to tell their employees? We would argue that yes, they do, not least because it will affect their employees’ net pay.

Employers can help keep their people in the loop by communicating the changes clearly. Using communication tools and opportunities such as emails, team meetings and one-to-one meetings will help employers to notify employees of the changes.

In order for employees to understand the changes to salary sacrifice rules in time to select their benefits, employers should ensure they are having these conversations before their company’s next benefit window opens between April 2017 and April 2018.

Impact on advisers
Quite obviously, financial advisers will need to stay up-to-date with the changes in order to ensure their advice reflects the new law. They should be making steps to proactively contact their employer clients in order to help them make the changes above, by the relevant trigger point.

The adviser may want to review the structure of group income protection and excepted life schemes for their clients. For example, where employers currently have their flexible life cover set up in an excepted scheme, advisers should consider the merits of continuing cover on this basis, versus a registered group life scheme which is exempt from the changes. It will be down to financial advisers to discuss which option is best for employees with their client.

In a nutshell
Changes in the rules around salary sacrifice will come into force on 6 April 2017 and will impact flex and voluntary group income protection and excepted group life schemes paid for via salary sacrifice. Although employers may not be affected immediately, they should be making arrangements that will prepare them for when new employees join the business and benefit contracts start or renew.

Advisers have a role to play in helping employers adjust, and a step-by-step checklist could help simplify the process for employers, ensuring they change their systems, and update income tax and National Insurance calculations in time.