Before Parliament ‘broke-up’ for the General Election, legislation was passed which seeks to limit the tax advantages of salary sacrifice arrangements; i.e. where an employee gives up part of his/her salary in exchange for a benefit such as the use of a car. However, the legislation goes further than this and applies where the employee has the choice of cash and a benefit. As this type of arrangement is common, it is likely that the new rules will apply more widely than originally thought.
In this blog, I’ll give an overview of the new rules (technical name: optional remuneration arrangements). If you think you are affected by the new rules and would like to discuss this, please do get in touch at firstname.lastname@example.org.
Who do the new rules affect?
The new rules apply to employers and employees in the following circumstances:
- where an employee gives up the right to receive an amount of earnings in exchange for a benefit (i.e. the typical salary sacrifice arrangement); or
- where an employee agrees to be provided with a benefit rather than an amount of earnings (i.e. the employee is given the choice between cash and a benefit and chooses the benefit).
Many of the most common benefits – eg cars; vans; loans – are caught by the new rules but pension contributions, childcare, cycle to work and low-emission cars are excluded.
What happens where the rules apply?
In calculating the taxable amount of the benefit in kind (BIK), the higher of the cash value of the benefit in kind and the earnings given-up is used. Note: there is no change in the tax treatment of a BIK where the value of the BIK is lower than or equal to the amount of cash foregone.
Paul has the choice of additional salary of £5,000 or the use of a company car (taxable value: £4,200). Paul choses the company car.
Prior to these rules, Paul would be taxed by reference to the taxable value of the car – £4,200. Under the new rules, Paul is taxed on the amount of cash forgone – £5,000 – as this exceeds the BIK value.
The consequences of this are as follows:
- For employers: employers will need to apply the new rules when calculating the BIK as part of the end-of-year P11D process for 2017/18 (i.e. this time next year), or earlier if they ‘payroll’ BIKs. If the value of the BIK is increased as a result of the new rules, the employer’s Class 1A NICs bill will be higher.
- For employees: Where the value of the BIK is increased by the new rules, the employee’s Income Tax liability will be higher.
Employers and employees are advised to consider the impact of the new rules on existing and new arrangements ASAP.
From when do the new rules apply?
This is the complicated bit. The new rules apply from 6 April 2017. However, there is some protection for arrangements in existence before that date (‘pre-existing arrangements’). For pre-existing arrangements, the commencement date is the later of:
- The date the arrangement is changed or renewed;
- 6 April 2021 for cars, vans, fuel, accommodation and school fees; and
- 6 April 2018 for other benefits within the rules.
Employers will need to be alert to changes in pre-existing arrangements to ensure that the new rules are applied correctly.
The rules are introduced by FA 2017, s. 7; Sch. 2
HMRC guidance can be found here
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