Changes are coming to the way benefits in kind are taxed – employers and employees should prepare themselves for the future.
Millions of British employees receive ‘perks’ from their employers: ‘benefits in kind’ (BiK) which include anything from childcare vouchers and mobile phones, to medical insurance and company cars.
Whether administered in addition to an employee’s cash remuneration, or as part of a salary sacrifice arrangement, these benefits may or may not be taxed, and may exempt employers from their National Insurance Contribution obligations.
By saving on income tax and NIC for employees (and NIC for employers), salary sacrifice schemes have, until now, represented a ‘win-win’ arrangement for British businesses. However, things are about to change.
Tax shake-up for salary sacrifice schemes
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.
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.
The new legislation doesn’t eliminate salary sacrifice schemes, but it will significantly affect the shape of the benefits in kind landscape for Britain’s workforce. As a business-owner, it’s important that you understand the status of your salary sacrifice scheme – and your obligations to your employees.
With this in mind, let’s look at the current salary sacrifice system, and what consequences the government’s changes have on salary sacrifice schemes.
Salary sacrifice and benefits in kind
At present, many benefits in kind – like gym membership, mobile phones, laptops and removal expenses – are available to employees tax-free, as part of a salary sacrifice scheme. The perks and benefits you can receive include:
- 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
Benefits in Kind available tax-free from April 2017
However, under the new legislation, that tax-free eligibility is being removed for the vast majority of benefits.
From April 2017, tax-free benefits in kind will be limited to:
- Pension contributions and financial advice
- Cycle to work schemes and bike safety equipment
- Childcare vouchers
- Ultra 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 NIC exemption for employees, so some degree of financial savings are still possible through benefits in kind.
How are benefits in kind taxed?
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).
The set-up process involves initial online registration with HMRC before the tax year begins. You should ensure your payroll system software has the capability to incorporate benefits into its PAYE process.
All benefits in kind provided by the employer may be taxed through payroll – apart from interest free loans, living accommodation, and vouchers or credit tokens.
How much tax can salary sacrifice save?
The amount of tax your salary sacrifice scheme could save depends on your tax bracket, and how much of your wage you set aside for the benefits you are receiving:
|Basic-rate||20% tax, 12% NIC||£100 salary sacrifice = £32 saving|
|Higher-rate||40% tax, 2% NIC||£100 salary sacrifice =£42 saving|
|Additional-rate||45% tax, 2% NIC||£100 salary sacrifice = £47 saving|
If you choose to payroll benefits in kind, and have registered with HMRC, you must inform your employees immediately – and deliver specific information relating to those benefits prior to June 1 (in a new tax year).
That information is important to employees completing self-assessment tax returns and should detail which benefits are being payrolled (and which are not), and the cash value of those benefits.
Working out the cash equivalency of benefits is straightforward: if you are unsure, you may estimate the values at the start of the tax year and adjust them later for accuracy. Alternatively, you could use your company’s payroll software, or HMRC’s own calculator tool.
Preparing for the future
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.
While the government is citing the ‘unfair system’ as the reason for the shake-up, applying tax to work benefits is expected to recoup around £1 billion in the next six years.
Employees who currently receive tax-free salary sacrifice benefits will continue to do so until April 2018 if their arrangements were in place prior to 5 April, 2017. Benefits for company cars, school fees and accommodation will receive special extensions and remain tax free until April 2021.
In effect, the schedule means employees may still take advantage of some tax-free benefits offered by their salary sacrifice schemes for up to four years – if they sign-on before the 2017 cut-off.
That said, the added tax costs and NI contributions the benefits will involve under the new system may prompt employers to withdraw some or all benefits from their schemes before the deadlines come into effect.
About the author
This guide has been written exclusively for ByteStart by Simon Wright, Audit & Compliance manager at activpayroll. Simon provides employment tax and National Insurance compliance advice to his colleagues and to external clients. This advice can be on any issue around UK payroll compliance, expenses and benefits, statutory payments etc.
More help on tax and money matters
For more information and guidance to help you deal with the thorny subjects of tax, accounting and finance try some of our popular guides;
Paying less tax
- 10 ways small business owners can pay less tax
- Corporation Tax – How to reduce your bill
- Capital Allowances – A review of the various schemes available for businesses to cut their tax bill
- Using Research & Development tax relief to reduce your corporation tax bill, or claim a tax refund from HMRC.
- How setting up a salary sacrifice scheme can reward staff and mean lower tax bills for employers and employees
- ByteStart’s Guide to the main business taxes
- Sole Trader Tax – A guide for start-ups and the newly self employed
- Dividend tax changes from April 2016 – A summary of the financial effects for small business owners
- Tax rates, thresholds & allowances for small business owners 2015/2016
- 10 common Self-Assessment Tax Return mistakes and how to avoid them
- How to choose the best online accounting software for your business
- 15 Questions to ask when hiring an accountant for your small business
- Guide to Bookkeeping for new business owners
- Staying on top of your company accounts – Book-keeping Dos and Don’ts
- Book-keeping basics every new business owner must know
- The way to get paid – 12-Step Action Plan to stop customers from paying you late
- 8 signs that a small business may be approaching insolvency
- ByteStart’s Guide to insolvency, liquidation and bankruptcy for business owners
- Improve your cash flow – 7 ways to make sure your business gets paid on time, every time
- 10 late payment excuses used by customers – and how to deal with them
- What to do when the bank says “NO”!
- A Guide to ‘Alternative Finance’ – the new funding options for startups and small businesses
- 6 Things you need to know before launching a crowdfunding campaign for your business
- How peer-to-peer lending offers start-ups and small businesses a new funding option
- Finding finance for your new business – funding advice for start-ups