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PAYE simplification – but not as we know it

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23rd Aug 2016
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Significant changes to the tax treatment of benefits in kind and termination payments have been proposed in six separate consultations last week.

The package of measures, signposted in recent Budgets and Autumn statements, follows on from various Office of Tax Simplification (OTS) proposals. Employers and tax agents may think that overall this isn’t a victory for the simplification agenda, as there is still plenty of complexity to assimilate in the short term.

Salary sacrifice

We had been warned that the loss of employer NI through salary sacrifice had become unsustainable. Falling salaries, leading to increased state benefit entitlements, was also an issue for the government, which wants to cut £12bn from the social security benefits bill.

Salary sacrifice schemes had originally been the province of the big employers who could provide sophisticated flexible benefits packages. That changed from 2005, as the smaller employers embraced the new relief for childcare. Once the cost/benefit savings for childcare vouchers were apparent, schemes to sacrifice pay in favour of company-owned bicycles and additional pension contributions quickly followed.

Employer-provided childcare voucher schemes will close to new members (but not existing members) from 2018. The consultation on salary sacrifice for provision of benefits in kind makes it clear that the only remaining protected salary sacrifice schemes will be for employer provided:

  • bicycles,
  • pension contributions and pensions advice (the exemption for which increases to £500 per person p.a. from April 2017); and
  • intangible benefits such as extra annual leave days.

All other salary sacrifice schemes will no longer offer any tax advantages or employer NI savings, as the benefit provided in place of the sacrificed salary will be taxed via the P11D or payroll, and subject to Class 1A NI like any other non-exempt benefit-in-kind.

The big challenge will be the implementation date of 6 April 2017, as there will be a need to renegotiate with benefit suppliers and employees, and review payroll processes. There will still be employee NI savings on the sacrificed salary, so some employees may be keen to retain some benefit provision in place of salary. This will create a tension between employees and employers, as the employers may not be keen on supporting the admin cost of providing a benefit when this can’t be mitigated by an NI saving.

PSA process

For employers who use PSAs (PAYE Settlement Agreements) to pick up the cost of non-exempt benefits-in-kind, the consultation on simplifying the PSA process is welcome.

HMRC proposes that the PSA will not require an annual request, rather the employer will make a self-certified digital return by 6 July (capturing the same data as on the current paper request but with payment brought forward from October to 19 July (22 July for electronic). The range of benefits that can be included in a PSA will not be widened. However, some employers will have removed small value items (under £50) from their PSA for the 2016/17 tax year, using the new trivial benefit exemption.

Value made good

Another way to remove or reduce a tax obligation is for the employee to ‘make good’ some, or all, of the cash equivalent value of the benefit-in-kind. Currently there are a number of deadline dates by which making good must have taken place for the benefit charge to be successfully reduced/removed. In the consultation on alignment of dates for making good on benefits-in-kind, HMRC proposes that those dates will be aligned as:

  • the end of the pay period for non-cash vouchers (these can be payrolled from 6 April 2017 and draft legislation has now been published to effect this);
  • 1 June post year end for car and van fuel benefit, payment of credit card bills, and interest on beneficial loans;
  • the end of the tax year for all other benefits.  

Company cars

A company car remains one of the most attractive benefits-in-kind, but it is also highly taxed and company car tax raises significant revenues. The taxable benefit percentages for cars are also used to ‘nudge’ employers and employees to choose environmentally friendly cars by setting rates substantially lower for cars with low C02 emissions.

The Treasury is now consulting on company car tax for ultra-low emission vehicles (ULEVs) post 2020 (as taxable benefit rates are already announced until then). As most company cars come onto the private market after around three years, increasing the take up of ULEVs by making them attractive to company car users also increases their use more widely and will assist the government in meeting its environmental targets. The Treasury is asking for views on whether in future both C02 emissions and how far a car can travel before recharging should determine its tax rate.

Termination payments

Saying goodbye to employees is expensive, particularly if you get the tax and NI treatment wrong in respect of any termination payment. As expected HMRC are now consulting on aligning the tax and NI treatment of termination payments so that the £30,000 tax exemption applies equally to employer NICs. Any payment, contractual or otherwise, in excess of £30,000 would be subject to tax and employer NI from 6 April 2018 (it is anticipated this will be delivered via a new NI table letter).

In addition, foreign service relief will be removed and regulations will clarify that the total exemption for cases of termination resulting from injury or ill-health will not extend to payments related to ‘injury to feelings’.  

Future work

What is certain, is that HR and payroll professionals will have to have a long, hard look at remuneration packages from recruitment to termination to balance cost, attractiveness and complexity. This work will also have to be done quickly given that the first deadline is 6 April 2017.

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