Last week, Chancellor Philip Hammond announced an end to ‘unfair’ tax reliefs attached to a range of employee benefits accessed through salary sacrifice schemes, including gym memberships, health checks and mobile phone contracts. The move is set to cost employers and employees £85m in 2017/18, rising to £260m in 2020/21 and will raise just over £1bn in additional tax for the treasury. The Government defended the hit on employee perks, arguing that the restrictions will ‘promote fairness and broaden the tax base’; however, with stalled salaries and rising costs, many are questioning whether the latest changes will cost the British workforce far more than initial figures suggest.
An estimated sixty per cent of UK businesses currently offer some form of salary sacrifice. Common in medium and large organisations, salary sacrifice arrangements enable employees to opt for a lower cash salary in exchange for tax-free benefits in kind. Typical benefits accessed through salary sacrifice schemes include pension contributions and childcare vouchers, although benefits promoting health and wellbeing, such as medical screenings and gym membership, have become commonplace in recent years.
Following the economic downturn, salary sacrifice schemes have soared in popularity as, under current rules, employers are not required to pay national insurance on the sacrificed salary, making these arrangements an attractive means to maintain staff satisfaction and boost morale in lieu of salary increases. However, changes announced in last week’s Autumn Statement will see tax advantages stripped from many of the benefits offered through salary sacrifice schemes over the next six years, although childcare vouchers, pension savings, cycle-to-work schemes and ultra-low emission cars are currently exempt from the tightened restrictions. While the curbs will still spare employees from paying national insurance on any benefits they receive, employers will be required to contribute national insurance on any non-exempt benefits, meaning that much of the incentive to offer the schemes has been withdrawn.
While some have welcomed the curb on what they view as ‘middle-class perks’ that have enabled tax avoidance, critics have argued that tightening the rules around salary sacrifice schemes will have a huge impact on those that can least afford it. Debi O’Donovan, director of the Reward & Employee Benefits Association, said: “It will be the ‘just about managing’ employees who will be most affected by no longer having access to so many health and wellbeing benefits and mobile phones.
“The salary sacrifice arrangements have made many employee benefits affordable for lower-paid employees. This change will have little impact on the higher paid, who will probably continue to select the benefits they want or receive them as an employer-paid benefit”.
Luke Prankard at Thomsons Online Benefits shares O’Donovan’s view that the restrictions will have a wider impact than the Government realises; he commented: “Tightening the rules around salary sacrifice will unfairly affect ‘the sandwich generation’ – those working people who are already caring for their children and elderly parents in an under-provisioned social care system. Benefits offered through salary sacrifice were helping these people to look after themselves after dealing with these other family pressures. Now the government will be tightening the belts of the squeezed middle again.”
Concerns are rising about the potential knock-on effect the restrictions will have on an already stretched workforce. According to recent figures released by the Office of National Statistics, UK workforces were 31% less productive than those in the US and 17% less productive than the rest of the G7 countries in 2015. Vice President EMEA at Xactly, Tom Castley, said: “Both financial and non-financial rewards are vital for keeping workers motivated.
“Ultimately, the Government should be supporting, rather than limiting, businesses in engaging their workers, if we are to improve the UK’s productivity. Restricting tax free incentives is likely to be a false economy”.
In addition to waning morale, critics have also voiced concern that the removal of tax advantages on health and wellbeing perks could spark a devastating ripple effect, driving up costs for businesses and putting pressure on public services. Prankard commented: “Employers who have focused on preventative healthcare are already seeing healthier and happier workers. By abolishing tax incentives on health screenings and gym memberships, the government is making it prohibitively expensive for employers to encourage their employees to have healthy behaviours. This will have a huge impact further down the line – increasing the burden on the NHS and public finances”.
While it’s too early to gauge how many businesses will withdraw, or no longer consider health and wellbeing perks as a result of the Government’s restrictions, there’s no doubt that the reforms will be a barrier to responsible employers trying to maintain employee wellbeing and productivity levels. Carolyn Fairbairn, director-general of the CBI, believes the restrictions on health perks “sends the wrong signal to companies wanting to invest more in employee health and wellbeing”.
Fairbairn’s comment voices the concern of many critics that, penalising rather than rewarding, organisations for offering health and wellbeing benefits will risk the funds raised through additional tax. According to recent figures from the Department for Work and Pensions, 130 million days are lost due to sickness absence every year at a cost of £17 billion to the UK economy. Arguably, the removal of tax relief to benefits that directly link to health and wellbeing risks increasing these figures as organisations will axe costly benefits despite their proven benefits to employee wellbeing.
On balance, it is clear the Government’s reforms to salary sacrifice benefits will pose a challenge to businesses looking to offer benefits packages that not only encourage loyalty, but also help boost productivity and ensure employee expectations are met. While only time will tell whether the reform will raise much needed funds for the Treasury coffers, or prove to be a false economy, there’s no question the changes will affect a large number of organisations and a wide range of workers, from Office Junior to Executives.