UPDATED: Government mulls salary sacrifice restrictions
Budget documents reveal the government is looking to clamp down on the range of benefits available under salary sacrifice arrangements.
In the documents published alongside George Osborne's (pictured) budget today, HM Treasury said salary sacrifice arrangements enable employees to give up salary in return for benefits-in-kind that are often subject to more favourable tax treatment than salary.
It said it wants to encourage employers to offer certain benefits but is concerned about the growth of salary sacrifice schemes - noting that clearance requests for salary sacrifice arrangements from employers to HMRC have increased by over 30% since 2010.
HM Treasury said it was therefore considering limiting the range of benefits that attract income tax and NICs advantages when they are provided as part of salary sacrifice schemes.
But it said the government's intention is that pension saving, childcare and health-related benefits such as Cycle to Work should continue to benefit from income tax and NICs relief when provided through salary sacrifice arrangements.
PwC employment tax partner John Harding commented: "This announcement is not a surprise as HMRC has been looking at salary sacrifice with increased interest over the past year.
"While the devil will be in the detail it's clear that when it comes to salary sacrifice HMRC take a view that there is a 'good, the bad and the ugly'. Employers will be delighted to see that pension savings, childcare and cycle to work are clearly in the category of the 'good' salary sacrifices.
"However, we are suggesting that employers with wider salary sacrifice arrangements and flexible benefit schemes take the time now to review what they are offering to ensure that the benefits do not fall into HMRC's 'bad' salary sacrifices and that they continue to operate as intended and are not deemed 'ugly' by HMRC."
Aegon head of pensions Kate Smith welcomed the Chancellor's decision to rule out changes to salary sacrifice arrangements on pensions - noting such a move could have put pressure on the generosity of employer pension contributions
She said: "Removing or limiting the NI exemption on employers contributions would have been a blow to pension saving and could undermine the future success of automatic enrolment.
"It would increase employers' costs, and makes salary sacrifice arrangements less attractive, with the possibility of employers no longer offering employees this option. Employers and employees may react by saving less in a pension and failing to achieve the retirement income they aspire to. So its good news that the Chancellor has ruled out changes to salary sacrifice."
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