Optional Remuneration Arrangements – The new Salary Sacrifice
My August blog highlighted the changes that HMRC were proposing to make to salary sacrifice arrangements involving benefits in kind. The November Autumn Statement introduced additional exemptions and grandfathering provisions for certain existing arrangements.
What is ‘optional remuneration’?
The draft Finance Bill 2017 has recently published the detail on these changes. Interestingly, the term ‘salary sacrifice’ is not mentioned at all in the draft legislation, which refers throughout to ‘optional remuneration’. The draft legislation defines two distinct types of arrangement:
Type A – salary exchange arrangements
Type B – cash alternative arrangements
For Type A arrangements, the greatest impact will be on arrangements where the benefit would have been exempt were it not for the new legislation (e.g. workplace car parking, mobile phones and tablets).
It was not clear from the original proposals that Type B arrangements would be caught, but the draft legislation confirms this. The most common Type B arrangements that will be affected will be car cash alternative schemes, where employees choose between a company car or a cash alternative car allowance – with the impact being felt particularly in cases where employees choose a low CO2 emission car (creating a low benefit in kind) in place of a relatively high car cash allowance.
How does the tax charge work?
From April 2017, where ‘optional remuneration’ benefits are provided, a tax charge will apply to the higher of:
- the amount of earnings that the employee would have received if they had not taken the option of receiving the benefit; and
- the otherwise taxable ‘cash equivalent’ value of the benefit in kind
The employer will have to deduct Income Tax and pay Employer’s Class 1A NIC on the value of the optional remuneration. It is important to note that the tax charge does not include Employee’s NIC. This means that for many popular flexible benefit arrangements (such as private medical insurance), there will be no change if the pay exchanged is equal to the cost of the benefit.
What is excluded?
Essentially, all forms of non-cash benefits (including vouchers) are caught. However, HMRC have carved out exemptions for some of the more popular salary sacrifice arrangements:
- Pension contributions and pensions advice
- Childcare vouchers and provisions
- Cycle to work schemes
- Company cars with CO2 rating below 75g/km (ultra-low emission cars)
It is also important to note that the Government has confirmed it has no present plans to tax salary sacrifice in return for intangible benefits such as additional annual leave or flexible working hours.
When does it apply?
The new rules apply to all new salary sacrifice arrangements entered into after 5th April 2017, with grandfathering provisions announced in the recent Autumn Statement for existing arrangements:
- All arrangements already in place before 6th April 2017 will be protected from the new rules until 5th April 2018
- Any arrangements involving cars/vans, fuel, living accommodation and school fees are protected until 5th April 2021
This means that any renewals or variations made on or after 6th April 2017 will cease to be protected and the new arrangements will become taxable.
Unfortunately, the draft legislation still leaves a number of questions unanswered, and we await HMRC guidance for further clarification on these:
- What constitutes a ‘variation’ of an existing arrangement (especially for Type B arrangements)?How will any time apportionment work for in-year changes (pre and post rule changes)?
- How are dual funded benefits treated (i.e. arrangements that are part-funded by both employer and employee under salary exchange)
- How will the tax charge calculation work for Type B arrangements in which the employees can enhance their benefits by paying additional amounts (e.g. company car schemes where the employee can pay extra to ‘trade-up’ to a better car)?
It is anticipated that the 2017/18 P11D forms (to be issued in 2018) will be updated to incorporate the changes, and distinguish between normal benefits and benefits provided under optional remuneration arrangements.
There is also concern that employees’ 2017/18 PAYE Codes will not be adjusted to reflect the increased tax due from these changes, which will lead in time to tax underpayments and HMRC tax demands.
What should employers be doing now?
We recommend that employers urgently review all their benefit arrangements to assess whether they are caught by the new rules and which employees will be affected.
It is important also to assess whether any benefits will be categorised as Type A or Type B arrangements and whether they will be exempted under the grandfathering provisions. It may require urgent action before 6 April to preserve the benefit to employees under the transitional rules.
There remains uncertainty about some aspects of the changes, and how the P11D and RTI processes will deal with them. But, in the short term, the most important issue employers need to consider is to communicate with affected employees about these changes: there are still grey areas to be clarified but some early warning is likely to be appreciated by employees.
If you would like to discuss how any of the above may impact your business or future plans, please contact us at firstname.lastname@example.org – 01904 464 100.