Shifting legislation is one of many factors to consider when introducing tax-efficient benefits, Karen Thompson of the Institute of Payroll Professionals tells Debbie Lovewell
In recent years, speculation has been rife over the future of tax-efficient benefits. Moves such as the former Labour government’s removal of tax breaks on the home computing initiative (HCI) and former prime minister Gordon Brown’s attempts to withdraw the tax efficiencies on childcare vouchers (before bowing to industry pressure and watering his proposals down) have left many employers and benefits providers wondering what could be next for the axe.
The coalition government’s arrival has done little to dispel these fears. A number of changes to existing tax-efficient benefits, such as childcare vouchers, are due to come into effect next April, but that does not mean the tax breaks are necessarily here to stay, says Karen Thompson, associate director of policy, research and strategic visibility at the Institute of Payroll Professionals (IPP).
She believes, for example, that there are a number of factors that could indicate the tax breaks on childcare vouchers could potentially be under threat. As it stands, the available tax breaks are to be reduced for higher earners from 6 April 2011. But Thompson says the benefit may come under scrutiny by the coalition government. “If only I had a crystal ball,” she says. “[The government] kept saying that the full guidance, including all the questions we and others have asked, would be out in the summer. It has not arrived and when we ask where it is, to say we get very vague answers would be an understatement.
“My concern is[the tax change on childcare vouchers] is due to come into force in April next year and we are now in October. Employers have to amend contracts, have to put processes in place, and if they use software to do things, they need to amend their software, so why haven’t we got any guidance? My only suspicion or my only logical reason for that is – and I appreciate HMRC has been very busy – [the government] is going to do away with the tax relief. Because if you were going to do away with it, why would you spend time doing guidance?”
Coalition government review
Thompson says two main factors suggest the coalition may be reviewing the tax efficiencies on childcare vouchers. “One is the economic climate we are in: the fact [prime minister David Cameron] is looking to overhaul the whole benefits system and does not seem to have particularly a high priority for those with children,” she says.
“I am not saying children are not an overall priority for the coalition, but they do not seem to be as much of a priority as they were under Labour, therefore it could be it cannot afford to give tax relief on childcare. It could be Cameron is not quite so keen on mothers going back to work. He would rather have a family-oriented set-up; he certainly did when he was in opposition.”
Other planned tax changes could also influence the government’s decisions in this area, says Thompson. “It can also use the caveat that it plans to increase the personal allowance for the lower paid,” she says. “If you were a politician or even in HM Treasury, you would think ‘actually, we only want the lower-income, basic-rate taxpayers to benefit from this. In order to do this and remove the burden from employers – because we have told them the scheme we have proposed will be a huge burden – I think we will do away with tax relief on that because we are increasing the personal allowance’.
Personal allowance increase
“Therefore, that increase in personal allowance will help families with children and they will get the tax relief effectively directly.
“[Cameron] has a number of reasons why he should do it, how he can do it and his leverage to not get the low-income earners too irate. He does not seem to care particularly about the high earners anyway – the fact they are losing tax relief on childcare vouchers [and so on]. He does seem to think the rich should pay for the poor.”
But other tax-efficient benefits, such as pension contributions offered via salary sacrifice, may be safe. “Unlike childcare vouchers, would [the government] be brave enough to take away pensions relief completely when it is trying to encourage people to save?”
When offering tax-efficient benefits via salary sacrifice, employers should beware of some common pitfalls. First, they should ensure they fully understand the rules attached to the tax break, particularly where the benefit must be offered to all employees in order to qualify for the tax efficiencies, says Thompson. This rule applies to all tax-efficient benefits apart from childcare vouchers, which employers can offer even if some staff are unable to take them up because sacrificing their salary would push their take-home pay below the national minimum wage (NMW).
“Employers need to make sure they fully understand the rules, because getting it wrong can be very costly,” she explains. “The most common mistake is not understanding the legislation. A true salary sacrifice scheme, with the exception of childcare vouchers and the NMW issue, must be available to all. At one site, [they] could not say managers can have this [benefit] but other staff cannot. But [they] could say, for the office staff we could introduce a cycle-to-work scheme, but there is no point having it for remote workers.”
Employers should also ensure staff understand a scheme’s rules. “To have a cycle under salary sacrifice that is tax exempt, it must be used for a certain proportion of time to travel to and from work. What anecdotal evidence suggests is due to a misunderstanding of the rules, many staff take up bikes for work because they want to buy their child or partner one and therefore it is not a true sacrifice. Anecdotal evidence suggests there tends to be an increase [in take up] near Christmas. If they were to delve into it, they may find the bikes are not necessarily used in accordance with HMRC regulations, so that is a potential issue.”
Communication is also crucial to the success of a tax-efficient benefits scheme, says Thompson. “Communication of the pros and cons is absolutely critical before implementing any type of salary sacrifice scheme. Employers must make it clear what it is, and what [employees’] obligations are, for example if employers offer childcare vouchers aimed at lower-income earners who sacrifice their salary and then apply for child tax credits. If they sacrifice their salary, their earnings may take them below the threshold at which they would get those benefits.”
It is also worth taking steps to ensure a tax-efficient benefits scheme is suitable for an organisation’s workforce before deciding to introduce it, says Thompson. “Employers should ask whether there is an appetite for it. They might look to survey staff. If nobody is going to take it up, they will have gone through a lot of work for nothing.
“Assuming they get good feedback from staff, they then have to weigh up the savings on national insurance [NI] versus the administration costs. If the NI savings will cover the admin costs, or if the employer does not care how much it costs, but has a [specific] problem [to address], it might not matter. Employers need to decide what they want to achieve by introducing the benefit.”
Offering tax-efficient benefits can have a number of advantages for employers. As well as savings on employer NI contributions, such perks can also aid recruitment, retention and engagement. But to gain maximum value, employers should take the time to implement a scheme properly. Thompson concludes: “If you are going to do it, do it properly. There is an awful lot of work if you do not.”
Karen Thompson has been associate director of policy, research and strategic visibility at the Institute of Payroll Professionals (IPP), heading up the policy, lobbying, and payroll and pensions member services function since December 2007.
Before this, she was head of policy and secretary to the pensions faculty, and previously a policy and research officer at the IPP.
She has also been a payroll and pensions tutor at the IPP since 2000.
Thompson has more than 15 years’ experience in payroll and pensions, having worked in both the private and public sectors.
Before joining the IPP, she worked for organisations including Carlisle City Council, Two Castles Housing Association, Cumbria Constabulary and Lothian Regional Council.
She is also a member of the Admin Burdens Advisory Board and co-chair of the Employment Consultation Forum.
The Institute of Payroll Professionals at a glance
The Institute of Payroll Professionals (IPP) originated as an official industry body in 1985 when the Institute of British Payroll Managers (IBPM) was formed.
In 1998, the IBPM merged with the Association of Pensions and Superannuation Administrators to form the Institute of Payroll and Pensions Management (IPPM).
2006, the IPPM became the Institute of Payroll Professionals.
The only membership body for UK payroll professionals, it has 5,000 members and also provides qualifications, training and consultancy.
The IPP’s policy team represents members’ views at more than 60 government consultation forums.
Read more on voluntary benefits