New salary sacrifice rules disadvantage existing staff

Earlier this month, in a 17-page consultation paper, HMRC unveiled plans to change tax legislation so where a benefit-in-kind is provided through salary sacrifice, it will be chargeable to income tax and Class 1A employer national insurance contributions.

This is even if it is normally exempt from tax and Class 1A NICs, and will be payable on the greater of: the amount of salary sacrificed or the cash equivalent set out in statute (if any).

This would mean that where the normal taxable value of the benefit-in-kind is higher than the amount of salary sacrificed, it would be subject to tax and Class 1A NICs in the normal way.

Among the salary sacrifice schemes set to be hit by the limiting of tax benefits are life insurance or a mobile phone, which will now become taxable on employees.

However, the paper did state not all current salary sacrifice schemes would be hit by changes to the rules.

Is this not placing existing employees at a disadvantage and making sure that the playing field is indeed very uneven? Andrew Hubbard

HMRC has made clear that personal pension contributions through salary sacrifice are treated as employer contributions and are not included in the review.

Also excluded are: employer pension contributions; employer-provided pension advice based on the recommendations of the Financial Advice Market Review; employer-supported childcare and provision of workplace nurseries; and bicycles and cyclist’s safety equipment which meet the statutory conditions.

Andrew Hubbard, tax partner at accountancy firm RSM, said if an employer can allow an employee to choose from a range of flexible benefits at the start of employment without any adverse tax consequences, why shouldn’t an existing employee be allowed to do so also, particularly when their circumstances change?

“Is this not placing existing employees at a disadvantage and making sure that the playing field is indeed very uneven?” he asked.

“There is little logic in the proposal to remove the tax and NIC advantages of providing some benefits through salary sacrifice, whilst leaving others untouched.

“Nor is there any logic in allowing cycle-to-work schemes to benefit, but to exclude other health-related benefits; where should this distinction be drawn if the government is really seeking to encourage a healthy workforce?”

Mr Hubbard suggested these changes seem certain to make life more difficult for employers and employees alike, adding: “They may well be left asking whether levelling the playing field is the right solution after all.”