Autumn Statement 2016: Salary sacrifice perks curbed; pensions exempt from charges
In an Autumn Statement thin on surprises for private investors, chancellor Philip Hammond has announced a clampdown on salary sacrifice schemes.
These schemes are offered by employers and enable staff to divert some of their gross earnings into other employee benefits such as pensions or childcare schemes.
The arrangement means they pay tax and national insurance (NI) on a smaller income; the employer saves NI, which in some cases is also added to the employee's benefit contribution.
Hammond has announced that, with effect from April 2017, the tax benefits and employer NI savings of salary sacrifice schemes will be removed.
However, he highlighted several exceptions to the move - pensions (including advice), childcare, cycle to work schemes and ultra-low emission cars. These are among the most widely favoured benefits. Arrangements for cars, accommodation and school fees will continue until 2021.
The news is not unexpected. In the March Budget, then chancellor George Osborne flagged the government's concerns over the rapid growth of salary sacrifice schemes, highlighting the fact that clearance requests for such arrangements from employers to HM Revenue & Customs are up by more than 30% since 2010.
Trevor Clark, operations director of financial planner Rutherford Wilkinson, points out that “the core schemes of pension contributions childcare and cycle to work have survived, which is positive not negative news”.
“These are key benefits that can truly make a difference to someone's life, and at the same time save on both the employee's and employer's NI bill.”
However, Jon Greer, pension expert at Old Mutual Wealth, is less upbeat about the implications of the move for companies.
“Salary sacrifice has been a virtuous circle for employers. They offer their employees discounted benefits like private health insurance and attract good employees. The benefit to them is they don't have to pay as much national insurance,” he says.
“The impact of the proposed change to salary sacrifice will be a minefield for these companies. Either it will affect their bottom line if they choose to keep the schemes as they are, or they will have to ditch the benefit and risk employee upset.”
Greer suggests the biggest problem may be that some companies may stop offering private healthcare benefits putting the National Health Service under greater pressure.
“Worse still, this could be the beginning of getting rid of salary sacrifice altogether. Pension contributions aren't affected and it is likely the government is concerned about the impact scrapping pension contribution salary-sacrifice will have on auto-enrolment take up.
“But we shouldn't be too quick to rule out future changes as pensions represent a larger proportion of the lost national insurance contributions.”
A tax-efficient way of receiving staff benefits, where an employee agrees to forego a proportion of their salary for an equivalent contribution into their pension scheme or in exchange for company car, gym membership, childcare vouchers or private medical insurance. A salary sacrifice scheme is a matter of employment law, not tax law, and is often entered by an employee who is about to move into the higher 40% tax bracket.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.