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A Future for Salary Sacrifice?
The pre-Budget report issued by Alistair Darling this October left most of us asking that question.
In recent years, the proliferation of salary sacrifice as a means to providing employee benefits has been extensive. The savings in National Insurance Contributions (NICs) has meant that additional benefits could be provided, or new projects funded at little cost to anyone except the taxman.
But what issues have arisen from the popularity of this practice, and does it spell the end of the road for salary sacrifice?
It seems the answer to that question can be found by first answering the question of who was benefiting from salary sacrifice and whether that was seen as appropriate by the powers that be.
The framework for salary sacrifice was already in place due to legislation allowing for the provision of benefits such as canteen subsidy, pension arrangements, health assessments and car parking without tax or NIC consequences for companies and employees alike.
The start of the end?
This meant that people were already benefiting from tax advantages for these arrangements (and they weren't even having a pseudo-deduction from salary for them!). It seems that the HMRC and the Exchequer were happy for this to continue, or should we say that this was the case until the ill-fated Home Computers Initiative (HCI) expanded in popularity…
HCI used a simple tax break for reducing the liability on employee and employer for the provision of computers for home use. That tax break was then taken and promoted as a Government Initiative to promote IT literacy in the UK.
It was then abruptly removed, however, when the Government realised that the scheme was both being abused in terms of what was being purchased and by the wrong people. They had hoped the benefit would be targeted towards lower income employees, but it is believed the benefit was far more popular amongst higher rate tax payers, for whom the benefits were even greater.
The Holiday Pay Scheme was a programme that originated in Government backing for the protection of holiday rights for transient workers in the construction industry, who moved from job to job without accruing the entitlement to holiday or holiday pay.
Through an independent fund, workers accumulated the right to holiday pay. This was not subject to NICs, meaning that their pay went that little bit further and employers were incentivised to provide the benefit.
This loophole had begun to be exploited in recent years by some large national employers, whose employees did not seem to fit the profile of the worker for whom the benefit was originally intended. Consequently, the NIC advantage has recently been removed.
Similarly to HCI, this benefit has been removed by the Chancellor this October for being ‘exploited' by employees for whom the real benefit was not intended - higher rather than lower earners and permanent rather than transient workforces.
So where does that leave salary sacrifice as a concept?
The HMRC will tell you that they do not want to get involved in arrangements between employee and employer. However, they will clearly monitor the use of salary sacrifice as a mechanism for saving on tax and NICs, most likely with the intention of removing exploited loopholes.
To this end they have released guidance notes on the introduction of new salary sacrifice initiatives to the market. On the face of it this seems like a blow to the use of salary sacrifice. However, upon examination of the legislation, there is little in the way of tax exemptions that are not already being utilised through salary sacrifice and flexible benefits. With the guidance notes being forward-looking only, the scope for removing pension and other Government-backed benefits looks limited.
And, in any case, which Government is going to remove a further incentive for private pension provision at a time in our history when society is planning ahead less than ever before? Or what Government is going to remove the opportunity to subsidise childcare when it affects more and more of the electorate.
So, is it really the end for salary sacrifice? We don't believe so, but we do know that the real danger lies in incorrectly implemented schemes and their lack of best practice procedures.
Upon HMRC auditing salary sacrifice and flexible benefit schemes, and consequently identify the incorrect (or, in their terms, ‘ineffective') application of variations to terms of conditions of employment, the company may then find its entire pay and benefits scheme unfavourably reassessed to tax and NICs.
If you are relying on the savings you can make from salary sacrifice to provide additional benefits or fund new projects, then what will you have to do to secure the future of your salary sacrifice scheme?
Matthew Gregson
Senior Consultant
Thomsons Online Benefits - November 27th 2007
Please note these views are based on our own personal experiences and cannot be guaranteed. Always speak to a regulated financial adviser before making decisions on your pension investments which may affect your future. Thomsons Online Benefits is authorised and regulated by the Financial Services Authority.
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