This week has seen two papers published by HMRC proposing changes to certain areas of the tax regime for employees and former employees.
Salary sacrifice schemes are a long established method of funding employee benefits enabling the employee to save on income tax and NICs, and for the employer to save on employer’s NICs. Over the years, these “benefits” have grown from pensions and childcare vouchers to include slightly more “luxurious” benefits such as gym memberships, provision of mobile phones, purchase of computers and gaming equipment and car parking.
In the consultation paper “Consultation on Salary Sacrifice for Benefits in Kind”, it states;
“HMRC has seen significant growth in these schemes. There has been an increase of a third in PAYE clearance requests from employers for salary sacrifice arrangements between 2009/10 and 2014/15. The government believes that the growth of salary sacrifice has resulted in an increasing cost to the Exchequer due to the loss of tax and NICs. Also, salary sacrifice can artificially increase entitlement to tax credits or Universal Credit.”
As a consequence HMRC is proposing that only pension contributions, childcare vouchers and the cycle to work scheme can be funded through salary sacrifice.
This could have a significant impact upon employers who offer such benefits. They will need to check their employees’ contracts of employment to ensure they have the right to withdraw or change the benefit provided. If not, employers could be compelled to continue providing the benefit, at their cost, without any tax saving. Withdrawing a benefit without an employee’s agreement could result in, potentially, breach of contract and constructive dismissal claims.
The consultation closes on 19th October 2016 with a view to the changes coming into force in the 2017/18 tax year.
Taxation of termination payments
Prior to the budget there were rumours abound about changes to the tax regime of termination payments and whether the £30,000 tax free allowance would be abolished or reduced. HMRC conducted a consultation on this topic in summer 2015 and this week has published the response to that consultation.
First and foremost, the good news is that the £30,000 tax free allowance will remain. The aim of HMRC is now to simplify the tax treatment of termination payments.
The taxation of notice payments has been a long running source of dispute between lawyers and HMRC. The basic premise is that contractual notice payments are taxable and non-contractual ones are not. However, the question of what is “non-contractual” is often the subject of legal argument. HMRC takes the view that employers who have a custom and practice of paying in lieu of notice have created a contractual obligation which, therefore, renders the notice payment taxable. It is common for employers who are offering exiting employees a settlement agreement, to pay notice pay on a gross basis but to also impose a tax indemnity upon the employee so that if any tax liability does arise, it is the employee’s. This change means that employers will be obliged to deduct tax on notice pay at source and will reduce employers’ negotiating powers. This proposal is a little surprising given that there was no mention of this in the 2016 budget but it appears to be in response to a majority of the responses to the original consultation who favoured a unified approach to the taxation of notice payments.
In the same consultation paper, HMRC is also confirming the proposal made in the 2016 budget that employer NICs be payable upon termination payments over £30,000, which are currently exempt.
Finally, HMRC is also proposing that damages for injury to feelings be subject to tax and NICs. At present, only damages for injury to feelings arising out of termination of employment are taxable. Damages for injury to feelings arising out of treatment prior to the termination have the advantage of the £30,000 exemption. There has been a conflict in case law about this issue and, therefore, HMRC have proposed that all awards or settlements for injury to feelings must now be taxed in full. The only exception to this would be for psychological injury which prevents the employee from performing their job. In this case, medical evidence supporting the injury would, presumably, need to be produced.
Comments upon the responses are invited by 5th October 2016 and it is proposed that these measures come into force in April 2018.
For further information, please contact Jayne Holliday, Associate in the Employment Department on 0121 227 3887.