Consultation on salary sacrifice in relation to benefits-in-kind

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

After floating proposed reforms to the salary sacrifice system in last year’s budget and the Autumn Statement were trailed but were not brought in to effect, as was widely expected, in this year’s budget.

However, on 10 August 2016, HM Revenue & Customs issued a consultation document on “salary sacrifice for the provision of benefits in kind”.

Certain benefits-in-kind, which the Government seeks to encourage employers to provide to employees, are carved out from the consultation. These are:

• Employer pension contributions;
• Employer funded pension advice;
• Employer supported child-care and workplace nurseries; and
• Bicycles and associated safety equipment.

All other benefits in kind, it is proposed will be subject to a class 1A National Insurance Contribution charge.

However, it is not only the headline benefits-in-kind which will be subject to scrutiny; flexible benefit schemes under which employees are able to “trade” benefits-in-kind in exchange for cash are also intended to be covered.

Where salary is exchanged for intangible benefits, such as additional annual leave or flexible working hours, the current position will not change.

There are other health related exemptions from the benefit-in-kind regime such as health screening.

Our comment

The proposal to retain salary sacrifice in relation to pension contributions is a welcome move from HMRC and, as many employers are now using salary sacrifice alongside their automatic enrolment provision makes sense to encourage people to make private pension provision alongside the pension which will be provided from the State.

However, the imposition of class 1A National Insurance Contributions on other salary sacrifice exercises, for example on car purchase or leasing, will mean these schemes may become less popular.

Employers will need to review their current flexible benefits programmes to make sure that they are not inadvertently caught should HMRC proceed in the way envisaged in the consultation.

For anyone wishing to respond to the consultation, the closing date is 19 October 2016.