Tax changes to the treatment of salary sacrifice are not so much simplification of the tax system, as an unfair solution for both employers and employees, advisers have warned.
HM Revenue & Customs’ latest consultation seeks to limit the range of employee benefits in kind which attract income tax and national insurance contributions (NICs) advantages, when provided as part of salary sacrifice arrangements.
Jackie Hall, tax partner at RSM UK, said employers could be “forgiven for asking whether the government is really trying to tackle the tax cost of these arrangements or simply interfering in the way employers are able to attract and incentivise their workforce”.
Salary sacrifice arrangements allow employees to swap part of their cash pay for benefits or additional holiday. However, the consultation aims to make benefits in kind, provided through salary sacrifice, liable to tax.
Ms Hall said: “The government’s approach seems to seek to level the playing field between those employers who offer benefits through salary sacrifice and those who do not, by ignoring the benefits and instead taxing the salary which was sacrificed.
“Is this really the right way forward? The modern workforce demands a flexible approach to remuneration; employers in turn need to be able to provide flexibility to remain competitive in attracting the right employees for their business.
“The proposed level playing field may simply make it more difficult for employers.”
The 17-page consultation opened on 10 August and closes on 19 October. It was one of the many pieces of tax legislation which had been put on hold ahead of the referendum to leave the European Union.
The government paper proposes to change tax legislation so where a benefit in kind is provided through salary sacrifice - such as life insurance - it will be chargeable to income tax and Class 1A employer NICs, even if it is normally exempt from tax and Class 1A NICs.
These particular changes seem certain to make life more difficult for employers and employees alike Jackie HallThis means there would be no potential tax saving for the employee and no employers’ NIC saving for the employer.
According to Ms Hall: “The government’s approach seems to seek to level the playing field between those employers who offer benefits through salary sacrifice and those who do not, by ignoring the benefits and instead taxing the salary which was sacrificed.
“Is this really the right way forward? The modern workforce demands a flexible approach to remuneration; employers in turn need to be able to provide flexibility to remain competitive in attracting the right employees for their business.
“The proposed level playing field may simply make it more difficult for employers.”
According to Ms Hall, this could place existing employees at a disadvantage, meaning the playing field is indeed “very uneven”.
A number of benefits, including employer pension contributions, are protected from the new rules, she stated, adding there is little logic in the proposal to remove the tax and NIC advantages of providing some benefits through salary sacrifice, while leaving others untouched.
“Many tax changes are aimed, at least in part, in simplifying the tax system. These particular changes seem certain to make life more difficult for employers and employees alike and they may well be left asking whether levelling the playing field is the right solution after all.”
Susan Ball, head of employers’ advisory services at Crowe Clark Whitehill, warned against the government’s proposed tax on currently exempt benefits, such as life insurance.
“Under these plans, employers will continue to have to pay the administration costs of the scheme, but will get no 13.8 per cent national insurance saving,” she said. “Many employers will therefore be tempted to remove or reduce the salary sacrifice options available in future; they will have to balance this against the tensions this could cause with employees.”
How many tax changes?
Research conducted by Crowe Clark Whitehill revealed there have been 635 changes to the tax legislation since 2011.
The firm’s review of the Office for Budget Responsibility database shows the most common area for changes was income tax, with 165 changes, followed by corporation tax, with 122 changes.
The report also found there had been 24 changes to VAT and 81 changes to NICs.
simoney.kyriakou@ft.com
