In a 17-page consultation paper published this week, HM Revenue & Customs stated the government does not believe benefits-in-kind - effectively paid for by employees themselves through reductions in gross salary - should be provided by employers at a cost to the Exchequer through salary sacrifice arrangements.
HMRC unveiled plans to change tax legislation so that 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; and 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 the changes to the rules. Please note following clarification from the HMRC
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 from the rule changes are: employer pension contributions; employer-provided pension advice based on the recommendations of the Financial Advice Market Review (FAMR); employer-supported childcare and provision of workplace nurseries; and cycles and cyclist’s safety equipment which meet the statutory conditions.
Other health-related exemptions for benefits in kinds are in place to ensure that no tax or national insurance liabilities arise where employers pay for and provide certain benefits for their employees, such as health screenings, or because ascribing a value to the cost of the benefit to each employee benefitting may be difficult; for example, workplace gyms.
Where these benefits are provided through salary sacrifice, it is the employee who effectively pays for them, and the employer has, by setting the amount of salary that must be sacrificed, valued the benefit.
According to HMRC, the proposals it has set out for shaking up the salary sacrifice rules do not prevent employers from providing benefits to their employees through salary sacrifice, but it will remove the tax and national insurance advantages that come from doing so.
