Employee Benefit Changes
We reported in our June newsletter changes to the reporting of employee benefits with a move to pay rolling benefits.
The changes mean that you don’t need to submit a P11d for pay rolled benefits and expenses at the end of the tax year. However, the employer must register with HMRC to payroll benefits and expenses via the online service. This has to be completed at the start of the tax year for which you want to payroll i.e. if you wish to look at this for 2017-18 onwards, you need to register before 6th April 2017.
In addition to changes to the reporting regime, there are some changes to some common benefit arrangements.
In March 2016, the Government confirmed their plans for a Tax-Free Childcare scheme to be rolled out gradually from early 2017. The new arrangement will replace the current childcare voucher scheme for those who are not in the current scheme. The one big advantage of the new arrangement is that it will apply to working parents who are self-employed as well as to those who are employed.
Some parents will not be able to claim under the new Government scheme, so consideration should be given to joining an employer voucher scheme before it is too late, as the Childcare Vouchers scheme will be closed to new entrants from April 2018. Parents can remain on the Childcare Vouchers scheme beyond 2018 and for as long as they require.
The new scheme will allow some working parents (where both parents are working or are single parents) to claim up to £2,000 per child towards the cost of childcare per year. It has been proposed that for every 80p parents transfer to a dedicated online account and spend on regulated childcare, the Government will top this up with 20p, which is capped at up to £2,000 of savings per child per year. This is equivalent to the basic rate of tax. Parents will be able to use the vouchers with any Ofsted regulated childcare provider in England and the equivalent bodies in Scotland, Wales and Northern Ireland, just as they can with the current Childcare Vouchers.
The new scheme is not available for any couples where one parent is not working and parents who claim for children older than 12 years old. The proposed scheme will only be open to some working parents (where both parents are working or single parents) and the parent is not already getting support through the existing Childcare Voucher scheme. To be eligible, parents must be earning less than £100,000 annually, working a minimum of 16 hours per week and not be receiving support through tax credits.
Salary Sacrifice Schemes
Salary sacrifice schemes are a common arrangement for both employer and employee. They work by the cost of an employee benefit being deducted from the gross salary, reducing the amount on which income tax and national insurance has to be paid. The employee will still have to pay tax and national insurance – and the employer pays class 1A national insurance – on the benefit’s value (unless it is a tax free benefit). But this is often much less than the salary sacrificed. The schemes are common with tax free benefits such as childcare and pension contributions but also taxable benefits such as gym membership and company cars.
There are strict conditions for the implementation of the arrangement. However, in August HMRC issued a consultation to examine abolishing a number of benefits from such arrangements. The Treasury fears salary sacrifice schemes, have become so popular and that it is losing out on tax revenue as a result. Jane Ellison, Financial Secretary to the Treasury, said:
‘This growth represents an increasing cost to the exchequer and creates an uneven playing field between employees and employers who use such arrangements and benefit from the tax advantages and those that don’t.’
A common use for the arrangement which will impact a number of employed taxpayers is the company car. Deloitte’s have calculated that the change could impact an employee with a low emission car by up to £1,800.
How does it currently work?
The cost of leasing the car is deducted from the employee’s gross salary, reducing the amount on which income tax and national insurance has to be paid. The employee will still have to pay tax and national insurance – and the employer pays national insurance – on the car’s value for tax purposes. But this is often much less than the salary sacrificed because the system is designed to encourage the use of environmentally friendly cars which benefit from generous tax breaks.
If the Treasury goes ahead with its plans, employees and employers with company car schemes will have to pay tax on the full amount of salary sacrificed – in other words the cost of leasing the car, which was not their intention in entering into the arrangement.
It will be case of watching this space to see how the consultation progresses.
Harbour Key Limited
+44 (0) 1452 713277
7th September 2016