HM Revenue & Customs has produced a consultation document proposing an end to the tax and national insurance contributions (NICs) savings currently available by sacrificing salary for certain benefits. The consultation paper follows concern by the government and HMRC about the loss of revenue resulting from ‘salary sacrifice’ schemes.
Salary sacrifice schemes range from saving just the employees’ NICs to saving the employer’s and employees’ NICs and any income tax liability, which is the case with childcare vouchers, pension contributions and ‘cycle to work’ schemes.
Salary sacrifice schemes have grown by 33% over the last five years and, in addition to the lost NICs and PAYE revenue, employees can sometimes sacrifice their salary to the extent that the resulting lower salary can qualify them for some means-tested benefits, which is a further benefit to employees but is also a further drain on the government’s coffers.
The HMRC proposal is that from April 2017 the value of the benefit or the salary sacrificed, whichever is the higher, will be subject to tax and employer’s NICs. There would therefore be no tax benefit for employees or NIC benefit for employers in operating salary sacrifice schemes, although there would still be a benefit to employees because their NIC saving would remain.
As an exception, the current salary sacrifice arrangements for pension scheme contributions, childcare and cycle-to work schemes will not be affected by the proposed changes.
Although the consultation document proposes that the changes should be implemented from the 2017/2018 tax year, public consultation does not end until 19 October 2016, which leaves a very tight window in which to finalise the changes and put the necessary legislation in place. It is possible therefore that any changes to the current salary sacrifice regime will not come into effect until April 2018.
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