New ‘benefits in kind’ rules hit generous businesses the hardest
Created: March 2017
From April 6th 2017 a host of tax-free employee benefits are to be restricted.
The changes, first announced in last year’s Autumn Statement, will mean that several tax-free employee perks – such as gym memberships, health benefits and mobile phone contracts – will be added to an employee’s salary and will therefore be taxed.
While the Government is keen to trumpet its plans to gradually reduce Corporation Tax to 17% by 2020, less fanfare is being made about the clawing back of these employee tax perks.
And while the tax breaks are offered to employees, their removal will hit businesses hardest – especially those companies who are generous to their employees.
In an ironic twist, the new rules will have the greatest impact on ‘nice guy’ employers – hitting them with a double whammy of higher National Insurance and higher wage demands.
What are the new rules?
Under the current system, millions of employees receive company benefits -‘benefits in kind’ – that include anything from childcare and health insurance to mobile phones and gym memberships. Employees are given the option of salary sacrifice schemes – which allow them to give up part of their salary in exchange for these benefits.
From April employees will no longer have this option. These ‘benefits in kind’ are to become part of the employee’s salary and will therefore be taxed. The employer will have to pay income tax and National Insurance on these benefits.
The main benefits to be affected by the new rules will be gym memberships, health checks, mobile phone contracts, car parking and death in service.
The benefits that are protected until 2021 include accommodation arrangements, school fees and low emission cars.
The benefits that are exempt from these new policies include pensions, advice on pensions, childcare costs and the Bike to Work scheme.
Why are they being put in place?
Salary sacrifice schemes have been a rising cost for the Treasury. Growing by a third between 2010 and 2015, these schemes have become steadily more popular in recent years. As more companies adopt them, the Treasury has been losing out on both National Insurance contributions and income tax.
Stung by the furore over Business Rates, the Government is keen to burnish its pro-business credentials, and has been keen to focus attention on the gradual reduction of Corporation Tax.
So the taxing of previously tax-free employee benefits is a classic example of Westminster giving with one hand and taking with the other. This subtle stealth tax will help the Treasury meet the cost of its Corporation Tax giveaway.
How will they affect employees?
‘Benefits in kind’ can improve the day-to-day lives of employees and be a great incentive in the workplace. Currently employees are saving on these benefits as the perks are paid for out of gross earnings, and therefore are not being taxed.
Unfortunately, from April employees who have chosen salary sacrifice schemes will find themselves on the wrong side of the tax fence. The new laws will in effect take away the tax-free perks and instead employees will receive this money in salary and pay tax on it.
How will they affect businesses?
The new rules will be a major headache for businesses that currently use salary sacrifice schemes. As well as the challenge of changing their entire payroll system in such a short space of time, they will also face a double financial hit.
Along with paying higher National Insurance contributions, they could also end up paying higher wages. As employees will now be paying income tax on the monetary value of these benefits, they will effectively be earning less take-home pay and could therefore ask for a pay rise to compensate.
The laws will not prevent employers from offering benefits but they do take away the incentive for them to do so. Companies will find it harder to offer a compelling benefit package. To improve productivity the government should be supporting businesses in engaging their workers rather than restricting them.
The government’s plan to cut Corporation Tax will give businesses a boost, but the removal of several tax-free employee perks provides a stealth tax that could recoup much of what the Exchequer gives away. Companies who offer ‘benefits in kind’ will be put to a double-edged sword, paying higher amounts in National Insurance and higher wages.
Sadly it will be the most generous businesses that are the greatest victims of this stealth tax grab. Although the policy statement suggests that the rules are designed to promote fairness, ironically the ‘nice guys’ will be hit the hardest.
Employers should act now to understand – and mitigate – the impact on their bottom line. If you have your own concerns about how this will affect your business, contact Toby Ryland at HW Fisher & Company.
Toby Ryland, Corporate Tax Partner
T 020 7874 7959