QUARTER 1 2017 LEGISLATIVE UPDATE
Legislative update GUIDING YOU THROUGH THE LATEST CHANGES Our legislative update helps you make the most of changes to pensions law and regulation. Guiding you through the latest changes, we aim to give you confidence that your scheme will continue to meet your needs and deliver value for money and a good outcome for your employees. 2
Legislative update FEBRUARY 2017 01 02 03 GOVERNMENT UPDATE Salary sacrifice changes National Insurance reform Pension advice Page 4 REGULATION UPDATE Cap on early exit charges for pensions Page 14 SCOTTISH WIDOWS WORKPLACE PENSIONS REPORT 2016 1 in 10 opt-outs point to employer influence Page 15 3
01 GOVERNMENT UPDATE FEBRUARY LEGISLATIVE UPDATE The new Chancellor, Philip Hammond delivered his Autumn Statement on 23 rd November 2016. This update includes an in depth analysis of two of the announcements made relevant to employers and employees changes to salary sacrifice and National Insurance. THERE ARE NEW PROPOSALS TO LIMIT THE RANGE OF BENEFITS ATTRACTING TAX AND NI ADVANTAGES WHEN PROVIDED VIA SALARY SACRIFICE. 4
SALARY SACRIFICE CHANGES Legislation proposed in the Autumn Statement will end the current income tax and employer National Insurance savings linked to many benefits in kind when provided via salary sacrifice. The good news is that pension funding is excluded. We explain the consequences for some other key benefits. BACKGROUND In the Autumn Statement, the Chancellor confirmed the Government s intention to include legislation in Finance Bill 2017 to remove the tax and employer National Insurance (NI) advantages of most salary sacrifice, subject to transitional provisions and some exemptions. The Government first expressed concern about the rising costs of salary sacrifice to the Exchequer in the July 2015 Budget. It initiated an evidencegathering exercise at the following Autumn Statement. It used the March 2016 Budget to confirm that it was considering limiting the range of benefits attracting tax and NI advantages when provided via salary sacrifice. The Autumn Statement announcement followed HMRC s August 2016 Consultation on salary sacrifice for the provision of benefits in kind. The following summary is based on HMRC s August consultation and Autumn Statement 2016 documentation including draft Finance Bill 2017. However, the proposals will add additional layers to already complex legislation. Therefore, some change is possible as the draft legislation is consulted on and undergoes Parliamentary scrutiny before becoming law. PROPOSALS The proposals affect the income tax and employer NI treatment of benefits in kind provided by: salary sacrifice arrangements where employees agree to give up cash remuneration in exchange for some form of non-cash benefit in kind flexible benefit arrangements where employees can exchange cash remuneration for one or more benefits in kind flexible benefit arrangements where employees have allowances that can either be used for benefits in kind or taken in cash. The proposals aren t intended to cover: flexible benefit arrangements giving employees a choice of benefits in kind in addition to cash pay, without including a cash option benefits in kind not linked to salary sacrifice. Under current legislation, many benefits in kind are exempt from both income tax and all NI, while some are subject to income tax and employer class 1A NI, but exempt from employee NI. Where benefits in kind are subject to tax and NI, statutory valuations often apply. Giving up salary for a benefit in kind is attractive to employers and employees where it leads to income tax and NI savings for the employee, and NI savings for the employer. However, it s not possible to sacrifice salary below the national living wage/national minimum wage. And sacrificing salary can affect entitlement to some state benefits. The aim of the proposed legislation is to ensure that where benefits in kind are provided through salary sacrifice, they will be chargeable to income tax and employer Class 1A NI even if normally exempt, at the higher of: the amount of salary sacrificed the cash equivalent value of the benefit in kind set out in statute (if any). If the normal taxable value of the benefit in kind is higher than the amount of salary sacrifice, it will be subject to tax and Class 1A NI in the normal way. WHY THIS IS IMPORTANT TO KNOW The aim of the proposed legislation is to ensure that where benefits in kind are provided through salary sacrifice, they will be chargeable to income tax and employer class 1A NI. 5
EXEMPTIONS There will be no changes to the tax and NI treatment of any of the following benefits provided in connection with salary sacrifice arrangements: employer pension contributions employer-provided pension advice based on the recommendations of the Financial Advice Market Review employer-supported childcare and provision of workplace nurseries cycle to work scheme cycles and cyclist s safety equipment ultra-low emission cars (CO 2 emissions below 75g/km). TRANSITIONAL PROVISIONS The Autumn Statement took into account some of the concerns raised during HMRC s consultation and the following provisions will apply: salary sacrifice arrangements in place before April 2017 will be protected until April 2018 salary sacrifice arrangements in place before April 2017 for cars, accommodation and school fees will be protected until April 2021. APRIL 2017 Certain salary sacrifice arrangements in place by April 2017 will be protected until 2021 Cars Accommodation School fees APRIL 2021 6
WHAT MIGHT THIS MEAN IN PRACTICE? It s good news that there s no change to the treatment of salary sacrifice for pension contributions. The position is different for a range of other benefits commonly provided via salary sacrifice, including mobile phones and private use cars. An employer can provide a director or employee with a mobile phone including a smartphone for private use. The value of this benefit in kind is currently exempt from income tax and all NI whether or not it s funded by salary sacrifice. Any existing salary sacrifice arrangements linked to the provision of a mobile phone in place as at April 2017 will be protected until April 2018. But any new salary sacrifice arrangements set up from April 2017 will be caught by the new rules. EXAMPLE An employer provides a new mobile phone to an employee, covering the cost of a 670 two-year contract via salary sacrifice. The overall position under current legislation is as follows for basic, higher and additional rate taxpayers. This treatment will continue for existing salary sacrifice arrangements in place as at April 2017 until April 2018. Salary sacrifice in place by April 2017 Basic ( ) Higher ( ) Additional ( ) Gross salary sacrifice 670.00 670.00 670.00 Employee NI saving 80.40 13.40 13.40 Income tax saving on salary 134.00 268.00 301.50 Income tax on benefit in kind 0.00 0.00 0.00 Cost to employee 455.60 388.60 355.10 Employer class 1 NI saving Employer class 1A NI Net employer NI saving 0.00 0.00 0.00 New salary sacrifice from April 2017 Basic ( ) Higher ( ) * Based on higher of benefit in kind valuation and gross salary sacrifice. Additional ( ) Gross salary sacrifice 670.00 670.00 670.00 Employee NI saving 80.40 13.40 13.40 Income tax saving on salary 134.00 268.00 301.50 Income tax on benefit in kind* 134.00 268.00 301.50 Cost to employee 589.60 656.60 656.60 Employer class 1 NI saving Employer class 1A NI* Net employer NI saving 0.00 0.00 0.00 Employees can currently benefit from private use cars obtained via a range of options linked to salary sacrifice. Any existing salary sacrifice in place as at April 2017 will be protected until April 2021, but any new salary sacrifice arrangements set up from April 2017 will be caught by the new rules. The NI and income tax treatment currently depends on the precise nature of the arrangements. For example, in schemes where an employer leases a car and makes it available to the employee for private use, the employer incurs a Class 1A NI liability under benefit in kind rules, providing the car benefit is taxable on the employee as general earnings under ITEPA 2003. 7
INSURANCE AND HEALTH RELATED BENEFITS Disappointingly, no exemptions were announced for insurance and health related benefits. It s become increasingly common for employers to fund a core level of group life cover and possibly group income protection or group critical illness cover, and offer employees the option to top up their cover funded by salary sacrifice. Under current rules, group life and group income protection benefits for employees are exempt from income tax and all NI, both when the employer is fully funding the cost and when employees have selected top-up cover paid for by salary sacrifice. However, group critical illness benefits for employees are subject to income tax and class 1A NI. Under the proposals, there will be differential treatment for these types of cover, depending on whether top-up cover has been funded by salary sacrifice or not. When funded by salary sacrifice, benefits including group life cover and group income protection will be taxable and subject to class 1A NI. This is likely to create confusion and deter employees from topping up existing cover provided through their workplace. Premiums paid by an employer on relevant life policies are also exempt from income tax and all NI. We are not aware of employers offering this type of cover via salary sacrifice. However, it appears that employers offering relevant life cover to employees who wish to opt out of group life cover on a registered pension scheme basis because of lifetime allowance concerns may need to ensure they don t offer a cash alternative. Finally, it s important to remember that these changes won t affect personal protection policies funded by individuals themselves. WHY THIS IS IMPORTANT TO KNOW When funded by salary sacrifice, benefits including group life cover and group income protection will be taxable and subject to class 1A NI. 8
NATIONAL INSURANCE REFORM Following announcements made in the last Budget, the Chancellor confirmed a number of changes in the Autumn Statement. Our summary of the changes affecting employers is based on the Autumn Statement 2016 documentation and draft legislation published shortly afterwards. Some change is, therefore, possible as this is consulted on and undergoes Parliamentary scrutiny before becoming law. THE ALIGNMENT OF NATIONAL INSURANCE THRESHOLDS From 6 th April 2017 the National Insurance primary threshold (employee) and secondary threshold (employer) will be aligned. Both employees and employers will then start paying National Insurance Contributions (NICs) on weekly earnings over 157. This removes the 1 discrepancy between the thresholds and aims to reduce complexity for employers. 1 The discrepancy being removed between primary and secondary thresholds. 9
OFFICE OF TAX SIMPLIFICATION STUDY INTO THE CLOSER ALIGNMENT OF INCOME TAX AND NATIONAL INSURANCE The above measure was part of a number of proposals made by the Office of Tax Simplification (OTS) following the Government s request for it to review the closer alignment of income tax and National Insurance. The OTS provided a number of recommendations intended to create a simpler, more transparent and fairer system for taxpayers and employers. These include assessing employees for NICs in a similar way to how PAYE operates for income tax. Currently, if an individual has more than one employment source, these are treated separately for NICs with the result that someone with two part time jobs can pay less NICs than someone earning the same from a single employment. The Government is understood to be reviewing a number of the recommendations. 30,000 The amount up to which termination payments will remain exempt from employee NICs and free from Income Tax. TERMINATION PAYMENTS As announced at Budget 2016, the Government confirmed that from 6 th April 2018, termination payments above 30,000 which are subject to income tax will be subject to employer NICs. Termination payments will remain exempt from employee NICs and free from income tax up to 30,000. Termination payments can comprise minimum statutory amounts together with compensation paid by the employer for loss of employment. 10
STATUTORY RIGHTS TO REDUNDANCY PAYMENT Employees selected for redundancy must receive at least one week s notice for each year of service up to a maximum of 12 weeks. An employee who has accrued at least two years service is entitled to a minimum level of compensation by means of a statutory redundancy payment SRP calculated as follows: half a week s pay for each year s service before age 22; plus one week s pay for each year s service between ages 22 and 40; plus one and a half week s pay for each year s service from age 41. While no upper age limit applies, the maximum length of service for these purposes is capped at 20 years and with weekly pay currently capped at 479, the maximum SRP is 14,370 for those made redundant on or after 6 th April 2016. Many employees will be entitled to a termination package considerably better than the statutory minimum, and favourable tax treatment applies to payments made in consideration of the termination of a person s employment. We illustrate the current income tax and National Insurance treatment for these payments together with the revised position affecting employers from 6 th April 2018. ½ WEEK S PAY for each year s service <22 1 WEEK S PAY for each year s service from 22-40 1½ WEEK S PAY for each year s service 41+ STATUTORY REDUNDANCY PAYMENT EXAMPLE An employee receives notice from their employer that they are being made redundant. They are required to work the minimum statutory notice period of 12 weeks during which they continue to receive their salary of 26,000 pa amounting to 6,000 over this period. They are entitled to SRP of 12,000. In addition, their employer pays them 24,000 compensation for loss of office upon leaving service, making a total termination payment of 36,000. CURRENT POSITION UP TO 5 TH APRIL 2018 Total payment 42,000 Income Tax Salary received during notice period Termination payment (above tax-free sum of 30,000) Employee NICs 6,000 Yes Yes Yes 6,000 Yes No No Employer NICs POSITION FROM 6 TH APRIL 2018 Total payment 42,000 Income Tax Salary received during notice period Termination payment (above tax-free sum of 30,000) Employee NICs 6,000 Yes Yes Yes 6,000 Yes No Yes Employer NICs 11
The Government consulted on simplifying the tax and National Insurance treatment of termination payments in July 2015, subsequently issuing a technical consultation on draft legislation in 6 th August 2016. Further changes due to be implemented from July 2018 include: treating all payments in lieu of notice (PILONs) as earnings and therefore subject to tax and National Insurance. This is a complex area and one which the Government believe is open to manipulation. Currently PILONs that are contractual are subject to income tax and Class 1 NICs, but non-contractual PILONs are not employers will be required to tax the equivalent of an employee s basic pay if their notice period isn t worked. WHY THIS IS IMPORTANT TO KNOW Many employees will be entitled to a termination package considerably better than the statutory minimum, and favourable tax treatment applies to payments made in consideration of the termination of a person s employment. 12
PENSION ADVICE The existing 150 income tax and National Insurance relief for employer-arranged financial advice increases to 500 from April 2017. From the same date, the Government also plans to introduce a 500 Pensions Advice Allowance to enable individuals to access their pension savings towards funding the cost of pensions and retirement advice. The allowance will be available on up to three occasions, in separate tax years. WHAT THIS MEANS The increase to 500 in the tax exempt employer funded advice limit and introduction of the Pensions Advice Allowance may encourage more individuals to seek advice. 13
Regulation update 02 REGULATION UPDATE CAP ON EARLY EXIT CHARGES FOR PENSIONS The Government wants to ensure that members choosing to access their pensions early under Pension Freedoms aren t deterred by the level of any charges imposed. The Financial Conduct Authority (FCA) has announced that from 31 st March 2017, early exit charges for existing contract based personal pensions, including workplace pensions will be capped at 1% of the value of the pension. Early exit charges that are currently below 1% may not be increased. Contracts entered into after the above date won t be able to levy any early exit charge. Similarly, following consultation conducted by the Department of Work and Pensions (DWP), the Government will introduce a cap of 1% on early exit charges imposed by trustees, managers and/or providers of occupational pension schemes. This will become effective from October 2017 again no cap can be applied to new members. WHY THIS IS IMPORTANT TO KNOW 1% Early exit charges capped at 1% of pension value. 14
Workplace Pensions Report 2016 03 SCOTTISH WIDOWS WORKPLACE PENSIONS REPORT 2016 1 IN 10 OPT-OUTS POINT TO EMPLOYER INFLUENCE A concerning number of workers have said they opted out of their workplace pension scheme because their employer encouraged them to do so. Employers need to be aware of their responsibilities under automatic enrolment and should carefully consider how conversations may be perceived by their employees. Research for the latest Scottish Widows Workplace Pensions Report revealed some really positive insights: only 3% of people said they intend to opt-out when minimum contributions go up, fewer people are failing to save for retirement and there are clear opportunities to better engage younger workers. But there is cause for concern after we examined the reasons people gave for opting out of their workplace pension scheme. Unsurprisingly, affordability is the most commonly cited reason, but strikingly, 9% said their employer encouraged them to opt-out. This seems to be more prevalent in smaller workforces (fewer than 50 employees), where the figure rises to 14%. The rules for employers are very clear and noncompliance can lead to fines or criminal prosecution. In fact, the notices that employees submit in the process of opting out must always include a statement explaining that employers cannot ask or force people to opt-out. 3% of people said they intend to opt-out when minimum contributions go up. 9% of people said their employer encouraged them to opt-out. 14% of people in smaller workforces said their employer encouraged opt-out. 15
Workplace Pensions Report 2016 7,000 The number of penalty notices for non-compliance issued by The Pensions Regulator. The smallest employers that are yet to stage should take note, as should organisations going through re-enrolment. The Pensions Regulator (TPR) has already issued over 7,000 fixed or escalating penalty notices for non-compliance with automatic enrolment rules. There s certainly a strong chance that some of this is unintentional employers may not be aware that they re dissuading members from saving for retirement. For that reason, it s important to consider communications (conversations in particular) carefully. However employers shouldn t shy away from talking about pensions. In addition to mandatory communications, there is a huge amount of value in providing more information on the scheme and on saving for the long-term generally. Workers will have questions too, and will expect their employer to at the very least be able to point them in the right direction. This could be the employer providing generic information to the whole workforce or an adviser giving specific, tailored advice to an employee. TPR has issued guidance for employers, explaining what they can and can t say about a pension scheme: www.thepensionsregulator.gov.uk/employers/ communicating-with-your-scheme-members The recent Financial Advice Market Review recognized some employers feel it is unclear where the line is drawn between general support for employees and regulated advice, and recommended that the Financial Conduct Authority (FCA) and TPR give greater clarity on what employers can or can t say without being subject to regulation. While this is being developed employers can seek help from advisers and pension providers in supporting their employees in the most appropriate way. WHY THIS IS IMPORTANT TO KNOW Affordability is the most commonly cited reason, but strikingly, 9% said their employer encouraged them to opt out. This seems to be more prevalent in smaller workforces. 16
LIFE FEELS BETTER WHEN YOU HAVE A PLAN Scottish Widows Limited. Registered in England and Wales No. 3196171. Registered office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number 181655. 26355 02/17