Tax  

Aon warns about salary sacrifice challenges

Aon warns about salary sacrifice challenges

Employers need to carefully communicate the potential changes to salary sacrifice or employees could claim they were made to make their benefit selections without knowing the full financial implications, Aon has warned.

This summer the government consulted on changes to the way salary sacrifice works.

In a 17-page consultation paper, 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.

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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.

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

While the changes are still at the consultation stage, Aon has still flagged advisers with corporate clients need to communicate carefully the potential for changes to salary sacrifice legislation for all benefit annual enrolments now.

It is widely believed chancellor Philip Hammond will announce changes to the treatment of certain salary sacrifice benefits in his first Autumn Statement, scheduled for 23 November.

Martha How, reward partner for Aon Employee Benefits, said: "This timing challenge is likely to impact the majority of employers.

"For Aon alone, this auto-enrolment period (between September and December 2016) represents 60 per cent of our flexible benefit clients.

"Employers have a real concern for employees who will be making benefit selections when the tax and National Insurance contribution situation is still unclear.

"How do employers communicate to staff that they can make selections as normal, but what they choose may or may not provide a tax or NIC benefit? This transition period is quite messy for employers and employees.”

Ms How added the taxation treatment of salary sacrifice benefits may be undergoing its most radical change for over 10 years and employers will need to reflect these changes in their benefit designs moving forward.

Richard Ross, chartered financial planner and chartered wealth manager at Chadwick's, said: "I would think most advisers use salary sacrifice solely for enhancing pension contributions and it looks likely this will be able to continue.