Chris Thorpe looks at where we are with benefits-in-kind, particularly in relation to the salary sacrifice rules.
It is very common for employees to receive non-cash remuneration in addition to their salary. In a more competitive market, many employers will add ‘perks’ to an employee’s package (e.g., a company car, health insurance, gym membership, etc.). A pension is now a compulsory addition to most jobs, but none of these are taxed in quite the same way as the cash salary.
Taxable or tax-free?
Benefits-in-kind (BIKs) are subject to income tax on the employee and Class 1A National Insurance contributions (NICs) on the employer; the income tax charge is based on the employer’s marginal cost of providing the benefit. In most cases, this will simply be the cost to the employer, but there a few oddities. For example, cars available for private use (even if there is no actual such use) are subject to income tax via the car’s list price and a percentage based upon the CO2 emissions; the cleaner the car, the cheaper the benefit. Car fuel is based on a fixed amount (£24,600 for 2021/22) and the same percentage; vans and their fuel are taxed on fixed amounts (£3,500 and £669 respectively for 2021/22).
However, several BIKs are tax-free: a mobile phone (smartphones these days, most likely!) for private use; a car parking space at or near a place of work; cycle to work schemes; childcare provision; and employer pension contributions being the most common. The tax efficiency of pensions makes those particularly valuable. One way of enjoying this tax efficiency is to have those employer pension contributions made in lieu of a corresponding amount of salary – replacing the income taxable and NIC-able salary with a totally tax-free pension contribution. This way, an employee is getting tax relief at their marginal rate on those employer contributions in addition to relief at source on their own contributions.
The same used to work for all BIKs; it was particularly useful for other tax-free BIKs, but even for those taxable benefits, the chargeable amount was usually less than that of the salary sacrificed (and thus tax saved). Primary Class 1 NICs was certainly saved, as BIKs are not subject to employee NICs, only employer contributions.
Salary sacrifice: all change
This ‘salary sacrifice’ option was popular for a long time. It was not always ideal; it involved an actual pay cut as reflected on an employee’s P60, so (for example) it would affect the ability to get a mortgage. There are also employment law ‘niceties’. For example, a salary sacrifice agreement used to require at least 12 months’ duration (this has been removed since the advent of auto-enrolment). Despite this, the tax savings made it a ‘no-brainer’ when it came to pension contributions and most BIKs.
Indeed, it was too effective, so HMRC cracked down on it. From April 2017, the curtain started to fall; the reduced or foregone salary becoming taxable instead of the BIK - even if that BIK was tax-free. By April 2021, the final vestiges of the old regime were destroyed, with school fees and accommodation being the last BIKs subject to the new rules. Only pensions, the cycle to work scheme, childcare provision and ultra-low emission cars remain untouched by the changes. The effect of these changes means that salary sacrifice no longer gives any income tax advantages; the only saving for the employee is the NICs.
Practical tip
Remember, these rules only take effect when salary is reduced or foregone; there is nothing stopping an employer from providing their workforce with a BIK (tax-free or not) on top of their salary; it was the tax relief achieved by the reduced salary that was HMRC’s ‘beef’. Smaller ‘trivial’ benefits can also be received by employees with no ill tax effects – provided it is below £50, not cash (or a cash voucher) and is purely ex-gratia. A £50 Amazon or M&S voucher is not as attractive as a flash company car or comfortable company digs, but will nevertheless be welcomed
