Salary sacrifice changes: What you need to know

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How changes to salary sacrifice schemes, which came in 1 April, will affect employers and employees

In the Autumn Statement chancellor Philip Hammond announced government plans to overhaul “unfair” salary sacrifice schemes. But confusion still reigns over exactly what this statement means.

“There are some misunderstandings about the current situation regarding salary sacrifice, never mind the change,” says Tony Nevin, director of employee benefits at Mazars. He explains that the most common misconception is that salary sacrifice is being scrapped.

But, says reward manager for Airbus UK Stephen Dumbleton, the final proposals “are not as draconian” as feared. “We were worried employees would be forced to pay an awful lot more [to remain in such schemes],” he says. “The final verdict is not as bad as it could have been.”

So what should employers be doing to ensure they are up to speed with the changes, and to ensure employees still get a good deal?

Understand the changes

In salary sacrifice schemes employees exchange some of their pay for a non-cash benefit, such as a smartphone contract. The employer and employee both make a tax saving because the benefit is taxed less than the equivalent amount of salary, or not taxed at all. However, from April 2017 employers and employees will pay the same taxes as everyone else.

This move will fix the taxable value of ‘benefits in kind’ (BIKs) provided through salary sacrifice at the higher one of: the cash forgone or the amount calculated under existing BIK rules.

There will be some exceptions; such as ultra-low emission cars, pension savings, childcare, and the cycle to work scheme. All arrangements in place before April 2017 will be protected for up to a year, and arrangements in place before April 2017 for cars, accommodation and school fees will be protected for up to four years.

Communicate changes

Dave Roberts, head of pensions and benefits for Virgin Media, says communication is key. “The most significant work will be around communicating changes to our salary sacrifice car scheme,” he says. “It does take away some of the opportunities we might have been thinking of around benefits, but many of these can be achieved in ways that are compliant with the tax changes, so it’s just a case of rethinking them a bit.”

Rosemary Lemon, group head of reward at Hays, says firms should stress the positives. “The most important thing is to make the value of the benefits come alive for employees,” she says. “Benefits should be more than just ‘market practice’, and employees should feel that their benefits add value to them and are an important part of their overall reward package.”

Ask employees what they want

“The downturn in salary sacrifice opportunities means it’s a good time to ask your employees what they want,” explains Roberts. “Employee benefits are adaptable to change, and the answer is to work with staff and their representatives to design the best solution. We’ll be spending some time doing that this year.

“If you can demonstrate that a benefit is more likely to attract and retain employees it will make for a compelling business case.”

Lemon says the benefits package at Hays is often appraised. “We regularly review the benefits we offer to ensure we maintain a wide range of choice, that employees are aware of what we have available, and how to access them,” she explains.

Explore other ways of offering great deals

One way large companies can continue to offer attractive benefits is by using their size as bargaining clout. “Our focus will remain on making sure that our people get value for money, and our size will help us get access to products and services at discounted prices, despite the less attractive tax incentives,” says Roberts.

“The withdrawal of salary sacrifice is only one element of the way benefits at Hays are delivered,” adds Lemon. “For example, we pass on the benefit of our corporate purchasing power to our employees and also offer voluntary benefits at a cost we hope is lower than individuals could get on their own.”

The key, according to Duncan Howell, corporate sales manager for salary sacrifice at TCH Leasing, is communication. “If you have any confusion speak to your salary sacrifice provider,” he advises. “They should be able to explain all of the changes and tailor a scheme that will suit your workforce.”

He adds: “In many cases employers and employees will want to continue using salary sacrifice schemes, as the cost increases will not be significant. The message we should be spreading is this is business as usual.”

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