Changes to salary sacrifice from April 2017
Changes to salary sacrifice will come into effect from April 2017. HMRC has provided some initial guidance on what employers need to do.
Salary sacrifice arrangements have become a key component of remuneration policies for increasing numbers of employers in recent years. Due to the associated tax and NIC advantages this growth has led to increasing cost to the Exchequer. The government was also concerned that the increase in salary sacrifice arrangements created 'an uneven playing field between employees and employers who use such arrangements and benefit from the tax advantages, and those that don’t.'
Following a consultation over the summer the government confirmed at Autumn Statement 2016 that it would legislate in Finance Bill 2017 to remove the Income Tax and employer NICs advantages of salary sacrifice schemes from 6 April 2017 – although the new rules will not affect pensions saving and a few other benefits.
ICAS submitted a written response to the consultation. This flagged some practical problems arising from the start date of 6 April 2017 – when many annual salary schemes would be part-way through their year. Amendments have been made to the proposals to address some of these issues.
Set out below is some initial guidance, provided by HMRC, on what employers need to do.
Which employers and benefits are affected?
Employers who provide benefits to employees in exchange for salary sacrifice or salary exchange or have a flexible benefits package where an employee can choose a benefit or cash. Employers who provide benefits but offer employees a cash alternative.
Benefits affected are those which are currently taxable, like cars and white goods, and those currently tax exempt, like mobile phones and workplace parking. There are some exceptions – mentioned below.
The taxable value of the benefit will be the higher of the current value or the cash forgone. This will be the value employers use for calculating Income Tax and Class 1A National Insurance Contributions (NICs).
What do employers need to do?
Employers using salary sacrifice with their employees need to familiarise themselves with the new rules.
Employers do not need to do anything if their employees are sacrificing salary only for pensions, pensions advice, childcare vouchers, workplace nurseries, directly employer contracted childcare, cycle to work or cars with emissions of, or under, 75 g CO2 / km. If employees are sacrificing salary for anything other than these benefits, then employers need to use the new rules.
Employers will report different taxable values in many cases, on the new P11D (see below ‘What changes will employers need to make in payroll and HR software?’).
When do the changes come into effect?
The new rules do not start until 6 April 2017. Salary sacrifice contracts entered into on or before 5 April 2017 will be protected up until the contract hits a trigger point.
What is a trigger point?
From 6 April 2017, the normal trigger point is when the salary sacrifice contract renews, auto-renews, starts, ends or is modified or changed. At this point an employer must use the new rules. This should align with normal ‘business as usual’ contractual arrangements.
However, if the existing contract is still in place on 6 April 2018, there will automatically be a trigger point on 6 April 2018 (this will be 6 April 2021 for cars with emissions over 75g CO2/km, accommodation benefits and school fees).
If an employee starts a contract on or after 6 April 2017, then the employer will need to use the new rules immediately for that employee. This will apply to new recruits.
What changes will employers need to make in payroll and HR software?
HMRC will be updating specifications and test services for the 2017-18 P11D and P46 (Car) reporting from April 2018, which will be provided as part of the usual year-on-year changes.
To make the first year easier, HMRC will not be updating the P46 Car for in year reporting and employers should continue to use the existing form. Employees who will need to pay more tax can either call HMRC, or wait and the normal P11D process will pick up any corrections after the end of the year.
In April 2018 HMRC will introduce a new version of the P46 (Car) along with a new P11D which will ask for details of any salary sacrificed to allow reporting of the extra information.
Employers who are voluntarily payrolling benefits
For the majority of benefits, most employers will be able to change one taxable value for another. HMRC recognise that for cars this may be more difficult due to software constraints. HMRC will release further technical guidance in late January for payrolling, including what employers should do if they cannot update their systems in time.
Employers need to make sure the right figure is being payrolled after a trigger point is hit; this is especially important for cars.
For 2017-18 HMRC is updating the software requirements for car data for those voluntarily payrolling benefits. These new requirements collect information about the car’s details, such as CO2 emissions and the list price.
Employers using an intermediary, payroll bureau or agent to do their payroll
These employers need to make sure that the intermediary or agent is aware that their employees are using salary sacrifice and that they use the correct taxable values, as described above.