U.K.: Employers Will Lose Tax Breaks for Paid Perks

Bloomberg Law for HR Professionals is a complete, one-stop resource, continuously updated, providing HR professionals with fast answers to a wide range of domestic and international human resources...

By Ali Qassim

British employers will lose tax breaks for offering employees certain paid perks like company cars and workplace gyms beginning in April, raising questions about whether businesses will provide more restrictive remuneration packages in the future, according to HR practitioners interviewed by Bloomberg BNA.

Effective April 6, 2017, companies will no longer be able to offer benefits such as health screening, mobile phones, TV computers and major appliances under “salary sacrifice”–an agreement under which an employer and an employee change the terms of the employment contract to reduce the employee’s entitlement to cash in exchange for the benefits. The Treasury said it will protect any arrangements put in place before April 5 until the so-called “trigger point” when the salary sacrifice contract renews or until April 2021, whichever is sooner.

Addressing Abuse

Defending the changes, the Treasury has said these benefits are currently “limited to employees of a small number of employers” and their taxation could result in additional government revenues of 85 million pounds ($106.7 million) in 2017-18, 235 million pounds ($294.7 million) in 2019-2020 and 260 million pounds ($326.2 million) in 2021-22.

According to Debi O’Donovan, founder of the Reward & Employee Benefits Association, “there has been a lot of support for many of [the changes] for some years because of the way some, not all, were being abused.”

“The government has done its research, listened to our industry and responded sensibly,” O'Donovan told Bloomberg BNA. “Salary sacrifice benefits are there to promote particular government agendas, for example encouraging more people to save for retirement. And this is what we have gone back to.”

‘Wrong Signal'?

O’Donovan emphasized that the changes will have “very little impact” since the “really big benefits, such as pensions contributions, childcare vouchers and bikes-for-work, are unaffected by this change.”

The Confederation of British Industry, however, the U.K.’s most powerful business lobby, fears that the restrictions to salary sacrifice could negatively affect employees’ health.

“Despite welcome exemptions in important areas like pensions and childcare, measures which restrict in-work benefits via salary sacrifice risk send the wrong signal to companies wanting to invest in employee health and wellbeing,” Neil Carberry, CBI director of employment, skills and public services, told Bloomberg BNA.

“Schemes, such as health screenings, are a key way in which employers can further support the wellbeing of their staff,” Carberry said. “Excluding benefits in-kind of this type from salary sacrifice schemes could diminish this contribution.”

Consequently, the CBI “would like to see the government review the impact of this policy decision to ensure that it does not adversely affect employee health.”

Smaller Businesses More Affected?

Smaller businesses could be the ones most negatively affected by the change, according to Nicholas Stretch, an employment and pensions partner at London-based law firm CMS Cameron McKenna LLP.

“For some time, a wide range of benefits being provided has been an advantage larger employers have over smaller employers,” Stretch said, “and salary sacrifice has enabled some smaller employers to offer benefit programs because of the employers’ [National Insurance contribution] saving. Without this, fewer smaller employers are likely to offer these savings.”

O’ Donovan concurred.

“Some, especially smaller employers, may decide not to offer the affected benefits anymore—especially if staff stop wanting them because there is no tax or Employee National Insurance benefit anymore.”

Changes in Engagement?

Regarding the longer-term impact on retention offering these benefits can provide employers, Stretch said that “it would be rare that an employee either joins or stays just because a benefit is offered, and the most that this change will bring about is an employer withdrawing a benefit.”

Stretch cautioned, however, that “with salary sacrifice going, the list of benefits that employers offer may fall, which may lead to employees having to arrange more things themselves and so if the employer is not providing these benefits, the engagement with the employer will fall.”

O’Donovan pointed out, however, that “employers can still offer the affected benefits on a voluntary basis so that employers can buy them but without the tax or NI break. Or employers can pay for them and keep the relevant tax or NI breaks.”

Administrative Costs

According to the Treasury, although the “minority of employers who operate salary sacrifice schemes will incur one-off costs for IT changes in addition to the normal annual cycle,” the costs are expected “to be negligible after taking behavioral changes into account.”

Stretch agreed that “in the short term, employers will also face administrative costs in making changes, as well as needing to dedicate internal resources to communicating the changes to employees, making the necessary payroll changes and managing transitional features.”

“The cost will vary from employer to employer and is likely to be phased over a few years,” O'Donovan said. “In some cases, employers will absorb the costs of the employee’s National Insurance where this arises but others will withdraw the benefit exchange altogether or make the employee take it out of after-tax pay. Where it could make a difference is if the employer has been using the Employer National Insurance saving to cover the cost of running the scheme.”

Otherwise, O'Donovan predicts that “additional costs will be relatively small” for the changes that “in the majority of cases” will “be made via the platforms that employers use to run these schemes.”

To contact the reporter on this story: Ali Qassim in London at correspondents@bna.com

To contact the editor responsible for this story: Rick Vollmar at rvollmar@bna.com

For More Information

For more information on British HR law and regulation, see the U.K. primer.

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Bloomberg Law for HR Professionals