New legislation introduced in April 2017 impacts ‘optional remuneration arrangements’ including certain salary sacrifice, flexible benefit and cash alternative structures.
Whilst employers need to be mindful of the changes and review the impact on current arrangements, subject to transitional rules for arrangements in place at 5 April 2017, certain benefits in kind, including notably contributions to a qualifying pension scheme, are excluded from the changes.
HMRC have specifically ring-fenced certain arrangements from the new legislation as these are the benefits that the Government wants to encourage employers to provide. Excluded arrangements include:
- employer contributions into registered pension arrangements;
- qualifying childcare and vouchers;
- provision of pension advice;
- qualifying bike to work schemes; and
- provision of ultra-low emission vehicles with CO2 emission ratings not exceeding 75 grams per kilometre.
Remuneration structures that allow employees to sacrifice salary in return for additional leave are also effective.
Employers who have not already done so, have the opportunity to review and introduce such arrangements as part of their remuneration strategy to reduce the overall NIC and in some cases the tax liability whilst also offering employees an attractive and flexible reward package.
Whilst the provision of other benefits, for example work place car parking and health assessments in conjunction with salary sacrifice after 6 April 2017 will now be taxable they will in most cases be liable to employer only NIC rather than employee NIC. It may therefore still be an attractive proposition for employees, particularly where the employer can negotiate bulk buying discounts.
The opportunity to generate cost efficiencies is particularly relevant considering the increased costs of auto-enrolment. The total minimum contribution required under pension auto enrolment is 8 per cent from April 2020.
Additionally, employers who have an annual pay bill of £3m or more and who are subject to the Apprenticeship Levy should be aware that the levy only applies to the elements of the pay bill that are subject to employer Class 1 NIC payments.
Qualifying employer pension contributions are not subject to NIC and therefore do not form part of the pay bill that is subject to the Apprenticeship Levy.
Whilst benefits such as employer pension contributions have been ring-fenced, employers still need to ensure that these arrangements constitute an effective salary sacrifice. These arrangements must also be structured so that the salary sacrifice does not result in any breach of national minimum or national living wage legislation, and most importantly, that the arrangement does not result in any detrimental impact to participating employees entitlement to state benefits.
What do employers need to do?
If you have not considered the introduction of salary sacrifice arrangements in relation to contributions to a registered pension scheme, you should do so now.
You should consider the use of salary sacrifice as part of the overall remuneration strategy in relation to other ring-fenced benefits.
You should review existing salary sacrifice arrangements and the impact of the new optional remuneration arrangement legislation.
Hold discussions with existing and prospective employees and provide suitable communication materials.
Monitor, on a case by case basis, situations where transitional rules apply to ensure that any variation of terms or renewal arrangements are identified which may result in the immediate application of the new rules.
How we can help
Our specialists can discuss and assist you with all aspects of an implementation of new arrangements. We can also ensure that these are implemented correctly and take account of employee entitlement to state benefits and the need to comply with national minimum wage and national living wage legislation.