In the 2016 Autumn Statement, Chancellor Philip Hammond announced changes to the way salary sacrifice benefits are taxed, with new rules coming into effect from April 2017.
The chancellor’s move to limit the tax-free eligibility of work benefits is intended to create a level playing field between employees using salary sacrifice – and those employees paying for the same goods and services with their post-tax income.
Essentially, the government wants to claim the tax and employer National Insurance contributions that many salary sacrifice schemes have been allowing employees and employers to avoid.
Millions of British employees receive ‘perks’ from their employers: ‘benefits in kind’ (BiK) which are available to them tax-free, as part of a salary sacrifice scheme. Until April this year these included:
- Private medical insurance
- Gym membership or sporting facilities
- Company cars and fuel allowances
- Mobile phone contracts
- Laptops or tablets
- Canteen or meal services
- Relocation or removal expenses
- Travel passes or dedicated work buses
- Bicycles and safety equipment
- Personal gifts for special occasions, like weddings or retirement
- Gifts for sporting or cultural events
Since April, tax-free benefits in kind have been limited to:
- Pension contributions and financial advice
- Cycle to work schemes and bike safety equipment
- Childcare vouchers, workplace nurseries
- Very low emission cars
- Charitable donations under the Payroll Giving scheme
The 2017 BiK changes do not ‘ban’ the range of salary sacrifice services offered by an employer (employees may still claim their company car or mobile phone) – but those benefits will now be subject to income tax and employer National Insurance Contributions.
The new tax rules do not affect the employee NIC savings, so some degree of financial savings are still possible through benefits in kind.
It is the responsibility of the employer to report and pay tax on the benefits in kind they offer their employees. There are two ways of administering tax payments for BiK:
Benefits in kind may be catalogued and submitted to HMRC on a P11D form at the end of the tax year. The submission should detail the taxable expenses and benefits given to employees or directors earning more than £8,500 a year.
It is now possible to pay tax on benefits in kind through your payroll PAYE system, eliminating the need to use the P11D form (although employer National Insurance Contributions will still need to be paid in this way).