AUTUMN STATEMENT RESPONSE EMPLOYEE BENEFITS OVERVIEW Page 2 Salary Sacrifice: Perks curbed Page 3 Employee and Employer NI aligned Page 3 Insurance Premium Tax Increases Page 4 Decreased Money Purchase Annual Allowance: It s now tougher to achieve true flexibility in retirement Autumn Statement Yesterday, Chancellor of the Exchequer, Philip Hammond MP, delivered his first (and last) Autumn Statement to parliament. Whilst he had little wiggle room or opportunity for giveaways, he has made some significant changes in taxation which will impact the delivery and design of workplace benefits. And, although the economy faces a greater degree of uncertainty, what is very clear is that the employment situation in the UK continues to be the great news story, with the Office for Budgetary Responsibility (OBR) now forecasting 500,000 more jobs than it previously was predicting before the Brexit vote on 23 rd June 2016. This, coupled with an existing, historically-low unemployment rate of just 4.9% and the Chancellor s announcements around increased investment in innovation, high tech manufacture and R&D, means that the UK s growing companies are likely to continue to face a tough recruitment market. These companies ability to attract, reward, engage and retain talent will be the difference between success and failure in the post Brexit world. Well designed and communicated workplace benefits will play a huge role in this. Here is a brief summary of the key points pertinent to employers and their employee benefits programmes: National Insurance: The Chancellor confirmed that the income level above which National Insurance is payable will be aligned to 157 per week as from April 2017. Salary Sacrifice: Tax and National Insurance advantages of most salary sacrifice schemes will be removed from April 2017, albeit with some transitional protections. Money Purchase Annual Allowance: MPAA will be reduced from 10,000 to 4,000 from April 2017 to further prevent pension recycling. We will continue to monitor developments resulting from the announcements and will keep you abreast of the outcomes as they emerge.
Salary Sacrifice: Perks curbed As anticipated, and following the recent HMRC consultation on the use of Salary Sacrifice schemes, the Chancellor clarified that existing tax advantages and freedoms will be restricted, if not removed entirely with few exceptions. Whilst Pension (including advice), Childcare Vouchers, Cycle to Work and Ultra Low Emission Vehicles schemes will continue to benefit, the many other benefits that currently take advantage of Salary Sacrifice will be treated as cash income and taxed accordingly. The review was triggered following a significant increase in the use of such arrangements, resulting in significant loss of tax revenues for the Exchequer. Furthermore, the number of benefits that were being included under Salary Sacrifice arrangements had become wideranging, extending to benefits such as health screens, car leasing schemes, mobile phones and retail vouchers. For example, the provision of a health screen by an employer to a director or employee is exempt from Income Tax and National Insurance. Therefore, if it is provided in addition to salary, there is no extra Tax or National Insurance liability. However, where it is provided under a Salary Sacrifice agreement, there can be savings for both the employer and employee relative to the employee purchasing a health screen from their take home pay. The example below shows the amount of Income Tax and National Insurance saved on a health screen with a value of 700 purchased through Salary Sacrifice by an employee in each income tax band, by an employer, and the overall cost to the Exchequer. Under Salary Sacrifice: Tax Rate Basic Higher Additional The impact on both employee income tax and employer and employee National Insurance is significant. Using the example above, a higher rate tax payer pays 294 less in tax and National Insurance each year under a Salary Sacrifice arrangement. What does this mean for employees and employers? Essentially, from April 2017 employees who give up salary in return for benefits will pay the same tax as the vast majority of people who buy the same benefits out of their post-tax income. Thankfully an area where the Consultation feedback was taken into account was around timing. It was originally proposed by the Chancellor that all changes would be effective from April 2017. However, yesterday, it was clarified that any arrangements in place before April 2017 will be protected until April 2018. This means that there is a brief window of opportunity for anyone joining a scheme up until the end of March 2017 to do so on the current salary sacrifice basis. Arrangements for cars, accommodation and school fees will be protected until April 2021. In the meantime, any employer using Salary Sacrifice will need to consider employees who have signed up to it, review their contracts, consider impact on their payroll, communicate any changes, and where flexible benefits arrangements exist, review platform design and salary deduction processes. We will continue to monitor developments resulting from the Salary Sacrifice consultation and will keep you abreast of the outcomes as they emerge. Richard Davey is Senior Consultant, Employee Benefits and Emily Gillmore is Flex and Online Director, Employee Benefits Employee reduces gross salary by: Cost to employee (reduction in net pay): Employee saves*: Employer saves**: 700 700 700 476 406 371 224 (32%) 294 (42%) 329 (47%) Cost to Exchequer: 321 391 426 * The employee s income tax and Class 1 NICs ** The employers NICs Essentially, from April 2017 employees who give up salary in return for benefits will pay the same tax as the vast majority of people who buy the same benefits out of their post-tax income. 2
Employee and Employer NI aligned Whilst no change in the rates applicable for employees and employers was announced, the Chancellor confirmed that the income level above which National Insurance is payable will be aligned to 157 per week as from April 2017. In the current tax year (2016/17), employees pay National Insurance on income from 155 per week (the Primary Threshold) at a rate of 12% and this falls to 2% on income above 827 per week. Employers pay National Insurance on income from 156 per week (the Secondary Threshold) at 13.8%. The additional National Insurance cost to employers will be 13.8% of 1 per week (or 52 per annum) - in other words about 7.18 per annum, per employee. Whilst this is not a significant amount, it does suggest that employers who are not using Salary Sacrifice schemes should review their options in this regard. The question we find ourselves asking at Arthur J. Gallagher is, 'is this the beginning of the end for National Insurance and a step towards a single tax on income?' Peter Hann is Executive Consulting Director, Employee Benefits Insurance Premium Tax Increases In a move to boost the much strained Treasury coffers, Mr Hammond has announced an increase in the rate of Insurance Premium Tax (IPT) from June 2017 to 12% from the current rate of 10%. Considering IPT was just 6% as recently as October 2015, this represents a doubling of the tax rate in just 2 years! It affects all manner of insurances, including employee benefits such as Private Medical Insurance, Cash Plans and Dental Covers, as well as general business and personal insurances. Employers offering Private Medical Insurance (PMI) to employees as part of their benefits package will need to find additional budget to fund the increase in IPT, at a time of increased spend due to rising medical inflation and the high cost of cancer drugs. But, what is even more concerning than yesterday's increase to IPT, was the comparison the Chancellor made between IPT and Value Added Tax (VAT), which currently stands at 20%. Could this signal the direction of travel for IPT rates in future? Could we see IPT at 20% by the end of the parliament? It would certainly increase much needed revenue for the Treasury and is unlikely to be a voteloser (how many of the 'Just About Managing' cohort being wooed by the government enjoy PMI cover, or know what IPT is?) What does this mean for employers? For those offering PMI for 100 employees or more, now could be an excellent time to consider alternative structures, such as Healthcare Trusts, to fund the medical cover. For those offering PMI for 100 employees or more, now could be an excellent time to consider alternative structures, such as Healthcare Trusts, to fund the medical cover. Use of a Healthcare Trust is an immediate way of negating the majority of the IPT charge as trusts are not considered to be insurance contracts and therefore do not attract IPT (although Stop Loss insurance, which often forms part of a Healthcare Trust, is subject to IPT). If IPT rates do continue to rise, it would mean a significant hike in premiums for employers who wish to continue to provide this valuable benefit to staff, unless alternative structures are explored. As well as negating the effects of IPT, a Healthcare Trust affords employers the opportunity to manage and control existing and future benefit design and, to a certain degree, spend. And whilst there are certain duties and responsibilities connected to operating a Healthcare Trust such as scheme documentation, Stop Loss insurance and regular scheme governance, much of this can be arranged with the help of an adviser in conjunction with an insurer to provide the administration. 3
Now is the time for employers to review their PMI design and structure. We are advising our clients to ensure that the implications of current and likely future changes to the taxation of benefits are understood. This latest increase to IPT may present an appropriate time to review the market for alternative options, design new benefit structures in the most tax efficient way, and ensure their benefits are, in the words of the Chancellor, match fit for the future. Nick McMenemy is Business Development Director, Employee Benefits and Graham Yearsley is Commercial Director, Employee Benefits Key Actions for HR and Benefits Practitioners: These are the key actions we recommend HR and Benefits practitioners undertake in response to the Autumn Statement: Conduct an impact assessment of all benefits likely to be affected by the forthcoming changes to Salary Sacrifice schemes. Consider pre-emptive communications to employees as to the likely changes. Review provision and funding of Private Healthcare for employees and consider Healthcare Trust viability. Segment and target active pension scheme members over age 55 with communications to explain new MPAA limits, what this means and what employees must do. Review re-enrolment and new employee onboarding processes to communicate with individuals over age 55 who may have used pension freedoms before they are enrolled into a Workplace Pension Scheme. Ensure Payroll departments are briefed on National Insurance threshold changes and systems are prepared. Arthur J. Gallagher can support and assist with all of the above actions. Decreased Money Purchase Annual Allowance: It s now tougher to achieve true flexibility in retirement When the Government introduced Pension Freedom and Choice rules in April 2015, giving pension savers much greater choice in how they draw on their pension funds from age 55, there was concern that individuals could withdraw and then reinvest significant funds back into their pensions. This recycling would effectively enable individuals to benefit from double tax relief. As a result, individuals who draw money out of pension under these freedoms face an immediate reduction in their personal Annual Allowance (the contribution limit within which tax relief applies) to 10,000 per annum, rather than the standard 40,000 per annum allowance. This reduced limit is known as the Money Purchase Annual Allowance (MPAA). The Autumn Statement announced that a consultation would begin immediately on reducing the MPAA to 4,000, to take effect as from April 2017. Commenting on the proposals, former Minister for Pensions, Steve Webb, said, "Cutting this allowance flies in the face of efforts to make retirement more flexible Starting to draw taxable pension cash becomes even more of a cliff-edge than at present. We should be trying to make combining work and drawing a pension easier not harder." It should be noted that the MPAA limit only applies if members take funds in addition to their tax-free cash entitlement, with the exception of those who use the excess to purchase a traditional annuity, where the ongoing payment amount cannot be decreased. The MPAA should not be confused with the general tapering of the Annual Allowance for high earners, those whose taxable income and pension contributions combined are in excess of 150,000 per annum. So why 4,000? The consultation document confirms that only 3% of individuals over age 55 saving into a DC pension are contributing more than 4,000 per annum. The statutory minimum contributions under Autoenrolment as from April 2019 (when the phasing in of minimum contributions is complete) will be less than 4,000 per annum. However, for those employers who use basic pay as their definition of pensionable pay, any employees whose income is above 44,444 could in fact breach the MPAA. 4
The Government acknowledges that there may be circumstances under which an individual, having already drawn on their pension, may wish to make further contributions, hence the ability to pay some form of ongoing contribution. The examples given are redundancy, bankruptcy or someone having gone through divorce where the pension assets may have been split. What does this mean for employers? Employers will not know what additional pension savings their employees hold outside of the workplace pension scheme and, hence, whether an individual has triggered the MPAA by withdrawing other pension funds under the new freedoms. However, employers must consider highlighting the potential issue to those staff age 55 and over by providing some form of targeted communication such as webinars or written briefings. Of more relevance is the interaction between Autoenrolment minimum contributions and the MPAA, as employers could find that employees who they have to Auto-enrol (and who have already triggered the MPAA) face tax charges which they could sleep-walk into. On a wider level, Auto-enrolment opt-out rates could increase as employees seek to avoid the potential MPAA tax charges. freedoms offered within the contract as possible. This would include a detailed review of the default investment fund to ensure it matches the way that many employees are now drawing their pension funds. The consultation will be open until 15 February 2017 and the Government will announce the new MPAA in the 2017 Budget. Peter Hann is Executive Consulting Director, Employee Benefits and Steve Threader is Head of Employee Benefits Consulting Starting to draw taxable pension cash becomes even more of a cliff-edge than at present. We should be trying to make combining work and drawing a pension easier not harder. -Steve Webb, former Minister for Pensions Our advice is that, in respect of Workplace Pension Schemes, employers should ensure that they are offering a modern plan with as many of the pension 5