Increases in employment income tax and NICs charges for employees and employers may arise as a result of recent changes to the taxation of flexible benefit packages and salary sacrifice arrangements.
Which arrangements are affected?
The new rules, which took effect from 6 April 2017, affect two types of commonly used arrangements – those under which an employee gives up the right, or the future right, to receive an amount of salary in return for receiving a benefit from their employer (“type A arrangements”) and those whereby an employee is given the opportunity to choose between receiving either a cash amount or a benefit ("type B arrangements”). These arrangements are described by HM Revenue and Customs as “optional remuneration arrangements".
HMRC have said that the change has been made to redress the advantage that use of these arrangements allowed. This is because prior to 6 April 2017, the provision of benefits under these optional remuneration arrangements resulted in employees paying less income tax and NICs than they would have paid had they been paid entirely in cash.
The new basis of valuation
Broadly, under the new rules, if an employee enters into an optional remuneration arrangement, the amount treated as earnings from the employee’s employment will now be:
- for type A arrangements, the greater of the salary sacrificed and the cash value of the benefit
- for type B arrangements, the greater of the cash amount and the cash value of the benefit.
The existing benefit exemptions will not apply to any benefit provided through an optional remuneration arrangement unless the benefit falls within a limited category of "excluded exemptions" (such as for employer provided childcare, cycles, counselling and other outplacement services). Where a benefit is no longer an exempt benefit, the cash value of the benefit will be deemed to be zero.
Transitional provisions
A number of transitional provisions apply so that most optional remuneration arrangements entered into before 6 April 2017 will continue to be taxed under the previous benefit valuation rules until 6 April 2018 (unless the arrangement is varied, renewed or modified before that date).
The new rules will come into effect on 6 April 2021 (at the latest) for optional remuneration arrangements involving cars with Co2 emissions of more than 75 grams per kilometre, car fuel, vans and van fuel, living accommodation and school fees.
Action to take
Employers should ensure that employees are notified of the changes to the benefit valuation rules and any expected increases in their income tax liabilities arising from these new rules. Employers should also note that varying existing benefit packages during the transitional period may trigger the early application of the new rules.
This article was written by Laura Allum in the incentives team. If you would like further guidance on the changes to the employee benefit rules then please contact Laura.