In simple terms, a successful salary sacrifice arrangement is one where the employee contractually gives up the right to receive some of their remuneration package, often in exchange for a non-cash benefit-in-kind.
However, this can extend to a wide range of things that an employee is contractually entitled to, for example bonuses and pension contributions. There are Income Tax savings to be had by the employee, as the value of the sacrifice will reduce taxable pay. There are also National Insurance Contribution (NICs) savings to be had by both employee and employer, as the sacrifice reduces NI’able pay as well.
(The key word in the previous sentences is ‘successful‘ – not all salary sacrifices that are established do meet this criteria. If the scheme is not successful, it will not enjoy the tax and NICs reductions that could be had.)
Not least for the savings that can be achieved for the employee and employer, such schemes are attractive. Although, as far as the Government is concerned, salary sacrifice schemes are not so attractive. Any mechanism that reduces the tax and NICs revenue for UK Plc is bound to raise eyebrows, albeit that successful schemes are perfectly legal and there is a wealth of guidance published in HMRC’s Employment Income Manual.
So, at a time when the Government is focused on maximising tax and NICs revenues, there are two 2015 announcements that may indicate future intentions regarding these legal avoidance schemes:
The Summer Budget 2015
The ‘Red Book’ that details all of the Budget announcements stated the following about salary sacrifice schemes:
They are becoming increasingly popular and the cost to the taxpayer is rising. The government will actively monitor the growth of these schemes and their effect on tax receipts
The Comprehensive Spending Review and Autumn Statement 2015
The ‘Blue Book’ that details the announcements from the above made the following comment:
The government remains concerned about the growth of salary sacrifice arrangements and is considering what action, if any, is necessary. The government will gather further evidence, including from employers, on salary sacrifice arrangements to inform its approach
So, in the space of a few months, the Government has gone from a ‘recognition and monitoring’ state to a ‘concerned and data gathering’ state. Will this data gathering result in a consultation in 2016 I wonder?
Legislatively, it will be fascinating to see what the Government proposes, if anything. The required changes for a successful salary sacrifice is an issue of employment law and it is hard to imagine how the provision of something by way of a contractual arrangement could be outlawed. Although, perhaps there is a precedence at the moment with the end of Employer Supported Childcare, commonly provided by the childcare voucher, upon the introduction of the Tax-Free Childcare scheme from 2017. So, there will have to be some interaction between employment law (the Employment Rights Act in Great Britain and the Employment Rights Order in Northern Ireland), the UK-wide taxation law (the Income Tax (Earnings and Pensions Act) 2003) and the different pieces of Social Security legislation that exist in Great Britain and Northern Ireland.
At the moment, however, rest assured that there are no changes.