For many employers, the decision by HMRC to launch a consultation into the salary sacrifice regime, whilst not unexpected, is an unwelcome distraction at a time of significant flux.
Regardless of your voting preference, there was always an acknowledgement that a decision to seek an exit from the EU would mean a period of uncertainty:
- How will it impact demand and consumer appetite?
- What will it mean for cost inflation, and ultimately, margins?
- And how will currency markets continue to interpret this time of change?
All this at a time when employers are grappling with how best to manage the introduction of the National Living Wage (NLW). Nobody is disputing the merits of the NLW and it is something we should be proud to champion across the economy. Benefex itself has gone one step further as an accredited member of the Living Wage Foundation. The challenge, though, for business leaders is clear: how to further preserve profit margins and improve productivity in an environment where the end consumer is not overly receptive to a price increase.
All valid concerns which inevitably led to this consultation being viewed with apprehension. However, an alternative view could exist; this consultation and its outcome also marks an exciting opportunity for the government to clearly define its agenda for public policy. ‘Really?’ I hear you ask. Yes, really! Let us explain why.
The role of government
The intervention of the state, it has long been argued, is best-focused on correcting market failure and shaping behaviours to benefit society. At a very simple level, this is the stepped tax rate which looks to protect the poorest. Or, the introduction of favourable tax breaks for those whose cars most support the wider global agenda so painstakingly carved out during the climate control COP21 talks in Paris (no link to Star Wars, despite the name!)
Whilst I appreciate the introduction may be viewed as lengthy, the context is important as we turn our focus to the salary sacrifice consultation.
The success of salary sacrifice
Salary sacrifice is as effective as it is simple to understand. Through the reduction of their taxable income, it can decrease the employee’s tax and National Insurance obligation. Yet it doesn't stop there. There is a benefit to the employer of investing the time and resources into its introduction; the saving of its own National Insurance bill. It is this simple effectiveness that led to it becoming so popular.
There is little doubt it has contributed positively. It has encouraged employees to consider looking at investing in their own health and wellbeing, security of their family and at a very granular level, saving more for their retirement. The latter point alone challenging a view that a pound in the pocket was an adequate substitute for a properly planned pension.
The devil is in the detail
Having received the government’s consultation which clarified the initial proposals, it was a relief to see that pensions, cycle to work and childcare vouchers are excluded from the scope of the review. However, the danger of introducing greater regulation is that a firm line must be drawn in the sand. Within this proposal, benefits such as life cover and income protection don’t appear to have escaped the scope of the proposed change. This feels like a wasted opportunity. Both benefits are intended to protect the employee, and therefore ultimately, the tax payer. It is hard to imagine that they should be any less valued than a pension, both being drawn upon in a time of need. With that in mind, as part of our response to the consultation, we encourage HMRC and the government to consider further this intentional or unintentional outcome.
We should extend this thinking further or we risk missing an opportunity. At a time when our government, quite rightly, is targeting increased connectivity to drive economic growth, is there merit to computers and mobile phones being outside the scope?
The internet was used “daily or almost daily by 82% of adults (41.8 million) in Great Britain in 2016, compared with 35% (16.2 million) in 2006” [ONS - Internet access – households and individuals: 2016]. It would appear reasonable to conclude that Salary sacrifice has supported this positive trend by making this technology more affordable. And it is worth stressing that basic tax rate payers achieve the greatest saving in National Insurance through salary sacrifice, which can only help to ensure technology is increasingly viewed as something for the many rather than the few. Critically, it contributes to an increasingly connected society across the UK whether you live in London or Land’s End.
In respect of cars, we have a separate consultation to encourage greater use of low emission vehicles. Our concern is that this consultation threatens to undermine the attractiveness and, ultimately, the likely success in increasing take up. Crucially, the absence of salary sacrifice removes the incentive and funding support for individuals. These are the very individuals who will determine if these two aspirations are successful or not.
The big opportunity
Allow us to come back to the initial question we posed at the outset. What should be the Government’s focus in setting a legislative agenda? There is no doubting there is a cost to the Exchequer associated with salary sacrifice. As highlighted by the consultation document itself, the Reward and Benefits profession has quite rightly seized upon the tax savings. However, this decision should be about more than pounds and pence. There are intangible benefits that are much harder to measure, but should not be dismissed.
Rather than throw the baby out of the bath water – as it could be argued this proposal might achieve – we are at a crossroads. Perhaps if we take a moment to stand back, there is an opportunity to truly define our Government’s role as a driver of positive change. And there is the much more practical consideration for business; is this really something we should rush into? We’ve started to see the Christmas decorations on the shelves of stores, pointing to the fact the New Year and ultimately the April 2017 Finance Act is looming large on the horizon.
Now, it's at this point we could all quite easily reject the validity of the proposal outright. It's an option.
That said, I mentioned there is a general acceptance that the boundaries have been stretched beyond the original intentions for salary sacrifice. These could be excluded by Government. How? An option is to look to our hugely successful Olympic rowing team for inspiration. These athletes manage their focus and plans by asking themselves one simple question: 'will our actions make the boat go faster?' Based upon their gold medal haul, it is certainly a successful approach.
The tax man considering the outcome of this consultation could adopt a similar test: 'Will this make my society better?' What an exciting and refreshing approach this would be; a really deserving cause I am sure we would all support.
Adam is Consulting Director at Benefex.