7 ways to adapt to today’s changes in salary sacrifice regulation
What is salary sacrifice?
Salary sacrifice schemes allow employees to give up part of their salary in return for non-cash benefits from their employer.
Up until now, the schemes have been a ‘win-win’ for both employers and employees:
-Employees save because they are not taxed for the portion of money that they put towards their benefit.
-Employers save because they pay less in National Insurance.
What’s going on?
The arrival of the Autumn Statement signals changes in the status quo.
Chancellor, Philip Hammond, announced today that he plans to restrict the tax-free benefits offered by salary sacrifice schemes.
What does this mean for you?
The non-cash benefit will no longer come out of the employee’s pre-tax pay, meaning employees and employers who have opted-in to salary sacrifice schemes will be subject to tax and NI. The tax charges will be the same as those applied to cash income.
Pensions, childcare vouchers, cycle-to-work and ultra-low emission cars will be exempt from the changes, in a bid to encourage take up.
When will changes be introduced?
From April 2017, the following types of scheme will no longer offer tax perks:
- Company cars
- Work-related training
- Car parking near your workplace
- Gym memberships
- Health screening checks
- Mobile phones, computers and tech
- Additional annual leave
- Will-writing services
- Gadget insurance
Any arrangements in place before this time will be protected for a year (until April 2018). Long-term agreements for cars, accommodation and school fees will be protected until April 2021.
Why is this happening?
The Treasury are clamping down on this as the schemes are becoming too costly and the Exchequer is making significant losses on income tax and NI contributions.
The clamp down comes after an increasing popularity in Pay As You Earn requests, which have increased by ⅓ in the 5 years preceding 2015, costing the government £15 billion a year.
A 24-month mobile phone contract worth £1,000 would cost the Exchequer £321 for a basic rate taxpayer, or £426 if the employee is in the highest rate tax bracket.
Why does this matter to UK businesses?
Many employers are reliant on the salary sacrifice mechanism to fund key areas of benefit provision. The changes mean the agreement will no longer be financially advantageous for the employee, nor the employer. In fact, the move is set to cost employees and employers £85m in 2017 rising to an additional £260m by 2020.
The short timeline stated is also likely to pose a problem for employers who may have to rethink their benefits offering.
It’s not all doom and gloom.
However, this doesn’t rule out salary sacrifice benefits altogether. As previously mentioned, there are valuable exemptions from the new regulations.
Also, although changes will take place as early as April 2017, employers with existing salary sacrifice arrangements will have until 2018 to plan, meaning the impact may well be more manageable that first thought. This also means that employers have 5 months to encourage employees to sign up for such schemes before the regulations are fully implemented. Struggling for ideas for a team Christmas present? Look no further!
7 ways to adapt to the changes:
- Identify the elements of your current salary sacrifice scheme that will be affected.
- Calculate the financial impact this may have on your business.
- Consider the psychological and financial effect the changes could have on your employees.
- Help your team to understand the changes by being open and transparent, encouraging questions and dialogue.
- Capitalise on the short timeframe and encourage employees to sign up to any existing salary sacrifice schemes that are popular with the team before April 2017.
- Look to ease financial pains by introducing other financial wellbeing solutions - voluntary benefits, such as those offered by us at Perkbox, help employees to make savings on everyday expenses, stretching their salary further.
- Remember that employees are not solely motivated by financial incentives. In fact, more and more research is proving that reward and recognition, wellness and encouraging work:life balance are also powerful motivators. Why not consider other creative and affordable alternatives to your salary sacrifice offering?
Perkbox is the UK’s leading employee engagement platform. We offer alternative employee engagement solutions, as well as salary sacrifice schemes. If you’d like to find out more about how we can help you to reward and motivate your team, click here.