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Autumn Statement 2016 - Benefits in kind

Many employees enjoy a range of benefits as part of their remuneration package. In some cases they are able to select which benefits they want to take in exchange for giving up part of their salary. This has traditionally resulted in savings in national insurance contributions for both parties and less tax for the employee.

The tax position on benefits in kind provided under such salary sacrifice arrangements is now set to change. From April 2017, with some particularly important exceptions, any benefit provided by way of salary sacrifice will be taxable on the greater of 1) the amount of salary sacrifice or 2) the cash equivalent as laid down by the tax legislation.

Let us first consider the exceptions. It will not apply to :

  • Pension contributions and any employer sponsored advice on pensions
  • Childcare vouchers provided by the employer
  • Provisions under the cycling to work scheme
  • Employer provided cars which are ultra low emissions

In all other cases it will be necessary to review if there is an adjustment to the current calculation. Indeed, for those employees currently paying tax on the cost value of the benefits actually receive, they will inevitably face an increased charge. This is because they will be taxed on the "grossed up" amount i.e. what they would have had to have earned in cash to buy the benefit including both tax and national insurance.

Broadly, for a higher rate taxpayer this could result in a nasty surprise and we believe the example below is not an untypical situation for someone in receipt of private medical insurance provided through an employer's scheme:

 

Cost of benefit

Employee tax @ 40%

Employee NIC @2%

Total charge on employee

2016/17

Medical insurance based on cost to employer

£1,000

£400

0

£400

2017/18

Medical insurance based on gross of salary sacrificed

£1,724

     

less

Cost of benefit

(£724)

£1,000

 £689.60

£34.48

£724

Increased charge for employee

     

 £324

This will affect employees where salary sacrifice arrangements are in place. Please contact Gill Tallon or your usual Mercer & Hole contact if there is anything you would like to discuss.

 

 

Date: 25th November, 2016
Author: Gill Tallon

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