From April 2017, new benefits in kind provided as part of salary sacrifice arrangements will be subject to income tax and NICs as if they were paid as salary, thus removing the tax and NICs benefits of many benefit packages. A number of arrangements will not be caught, however, and arrangements already in place will be protected from the new rules.
What had underpinned many salary sacrifice arrangements was that most benefits are exempt from employee’s NICs and many also have favourable employer’s NICs and tax treatment. It was therefore efficient for employees and employers to agree to “swap” fully taxable and NICable salary for benefits with favourable treatment and for either the employee or employer to benefit from the tax and NIC savings.
That will now change, although exempt from the new rules taking effect from April 2017 will be pension arrangements, pensions advice, cycle to work schemes and (an extra item added following consultation) ultra low emission cars which can continue to be provided under arrangements where tax and NIC savings are available. However, salary sacrifice arrangements for car parking, mobile phones and many other benefits can no longer be provided tax and NIC efficiently by salary sacrifice arrangements and so they may as well be provided out of after-tax salary.
There will be relief though that the Government has listened to representations and will not immediately apply the new rules to arrangements put in place before April 2017 (they will be protected for a year), and will give protection until April 2021 for arrangements put in place for cars, accommodation and educational arrangements.
During the HMRC consultation period preceding this announcement companies putting in place annual benefits programmes have faced extremely difficult decisions as to how to go ahead with their 2017 programmes as they have had to offer them not knowing what the true cost would be from April 17 (part way through the benefit year). Now, at least they can proceed with their 2017 offerings confident that the tax and NIC treatment will not change mid-year although 2018 and post-April 17 offerings will need to be rethought.