Exemptions for pensions and childcare, among others; employers told to expect ‘difficult issues’ over which benefits to continue
Benefits providers have reacted with surprise to the scale of changes to salary sacrifice schemes announced in the Autumn Statement – with employers being warned they will face difficult choices over which benefits to continue if the majority become uneconomic or unattractive for their staff.
Chancellor Philip Hammond said the government would abolish tax exemptions on most salary sacrifice benefits schemes from April 2017. Describing the difference between the tax paid on a cash salary and benefits-in-kind as “unfair”, he said: “Employees who use these schemes will pay the same taxes as everyone else.”
Pension schemes, childcare, cycle-to-work programmes and ultra-low emission vehicles with CO2 emissions of up to 75g/km will be exempt from the changes.
But the move still represents a huge shake-up for the scale and nature of employee benefits, which have mushroomed in recent years as employers craft highly targeted and personalised benefit packages for their staff with the help of providers.
Salary sacrifice is not being banned, but will become significantly less attractive when it is subject to tax that effectively makes an employer-provided benefit no cheaper than one purchased on the open market, unless the employer absorbs the tax charge.
The government said it was acting to recover revenue from what HMRC had described as a proliferation of ‘luxury’ schemes offering everything from mobile phones to white goods via salary sacrifice. But there was surprise that health benefits such as gym memberships were not exempted, and some in the industry claimed lower-paid staff would be the worst hit by the changes.
The fleet industry is likely to be seriously affected. Take-up of company cars is in decline amid reducing budgets, and many tax benefits affecting the sector had already been tightened. Matt Dyer, managing director of LeasePlan, one of the largest fleet providers, said: “The chancellor's decision to target cars gained through salary sacrifice is both destructive and disappointing for the motoring industry. The vehicle rental and leasing industry contributes £24.9bn a year to the UK economy, and company car leasing schemes are a large part of that success story – with more than half of new car sales alone last year going into fleets.”
Dyer said implementing the changes next April meant providers and employers would have comparatively little time to comply. “This will lead to unwelcome complexity for very little gain,” he said.
Debi O’Donovan, founder of the Reward & Employee Benefits Association, said the number of benefits that would be affected by the move would create hardship for those the government was aiming to help through the Autumn Statement: “It will be those employees who are ‘just about managing’ who will be most affected by no longer having access to so many health and wellbeing benefits and mobile phones,” she said. “This change will have little impact on the higher-paid who will probably continue to afford to select the benefits they want, or receive them as an employer-paid benefit.”
Employees who have entered long-term workplace benefits contracts with their employers will be able to continue with them until April 2018, and those with current arrangements for cars, accommodation and school fees will be protected until April 2021.
Sarah Dowzell, chief operating officer at Natural HR, said she was disappointed by the government’s lack of focus on protecting health and wellbeing benefits such as gym memberships and health insurance: “I’m really surprised that we will see the end of salary sacrifice arrangements on gym memberships; it seems very short-sighted. We often hear that around 60 per cent of adults are overweight. Surely making gyms more affordable and encouraging exercise would have a positive impact on our health system?”
But Debra Corey, group reward director at rival provider Reward Gateway, acknowledged that salary sacrifice had “gotten out of hand” with its extension into white goods and computers, and was often unnecessarily complex. She argued, however, that tax savings from the schemes had enabled organisations to invest in their employees.
The new regulations will also apply in cases where an employer offers its staff a choice between a benefit and a cash alternative, if the benefit is not wanted. The changes are anticipated to raise £85m in 2017-18 and £235m per annum going forwards, according to Mark Groom, a tax partner at Deloitte.
The employee benefits industry will have to create “attractive and innovative benefits through an alternative mechanism” to salary sacrifice, said James Malia, director of employee benefits at Sodexo Benefits and Rewards Services. He added: “Even without tax efficiencies, many of the benefits in question can still be of great value to employees, and this should not be overlooked. Providers must work with businesses to establish a sustainable method of funding these important schemes, which improve the day-to-day lives of employees.”
Nick Willis, director and solicitor at PwC, said the changes had the potential to create a huge administrative burden on employers. “Salary sacrifice arrangements form part of employees' terms and conditions. Employers will therefore need to look urgently at these arrangements and the contractual promises they have made to assess whether, and how, benefits will be continued post-abolition of salary sacrifice,” he said. “Difficult issues will arise over who will bear any increased cost in benefit provision, and whether an employer has the flexibility to cease providing a benefit that has become prohibitively expensive.”