Last week saw the publication of a consultation document on restricting the use of salary sacrifice and the government's response to the consultation on how termination payments are treated for the purposes of tax and National Insurance contributions ("NICs").
The consultation on restricting the use of salary sacrifice proposes that from April 2017 certain benefits in kind (whether taxable or exempt) provided through salary sacrifice will become chargeable to income tax and employer NICs on the greater of the amount of salary sacrificed and the cash equivalent specified by statute (if any).
Salary exchanged for the following benefits will remain unaffected by the proposed changes:
employer pension contributions and employer-provided pension advice;
provision of workplace nurseries;
cycles and cyclist’s safety equipment provided under the cycle to work scheme; and
intangible benefits such as flexible working or additional holiday entitlement.
The proposed changes for taxation on termination payments, which were published together with draft legislation, are expected to take effect in April 2018. They include:
1. Making all notice pay including PILONs subject to deductions for income tax and Class 1 NICs
Any payment that the employee would have received if he or she had worked their notice period will be subject to deductions for income tax and Class 1 NICs under the new legislation, i.e. regardless of whether the employee receives a payment in lieu of notice ("PILON") and regardless of whether there is a contractual right for the employer to do so.
2. Making employer NICs payable on payments above £30,000
Employer NICs will now be payable on ex-gratia termination payments above £30,000 to bring closer in line the different rules for income tax and employer NICs. The entirety of the termination payment will remain exempt from employee NICs, and the first £30,000 of any such payment will also remain free from deductions for income tax.
3. Removing the foreign service relief exemption
The government will remove the foreign service relief exemption believing it to be outdated reflecting today global workforce and the government do not feel this exceptional treatment is still justifiable.
4. Clarifying that the tax-free exemption for injury does not apply to injured feelings
Under the existing regime, if a termination payment relates to an injury or discrimination to the employee, it can be paid tax free.
Under the proposed new regime, this exemption will remain but the government has confirmed that it will not apply to injured feelings. In order for the exemption to apply there must be an injury or disability of a physical or psychological nature that is sufficient to cause the employee to be unable to perform his or her job properly.