Payroll insight
But I think the main misunderstanding is with employees. Some ask to sacrifice all their wage for a pension scheme and when they have been told they can’t, they are not happy with the arrangement. There is some misunderstanding surrounding the benefits or implications and the employer struggles to help with this. I think more education is needed for both employees and employers surrounding the subject. Richmal: National minimum wage (NMW) rules are considerably more complex than most employers believe them to be. Even big names such as Tesco and John Lewis have had issues with underpayment of NMW in recent times. I believe that, on the most part, employers being caught out by not paying NMW when operating a salary sacrifice are not aware that they are in breach of NMW rules. I think this could be tackled by better education and resources for employers on the rules, restrictions and nuances of NMW, especially before an employer decides to enter into a salary sacrifice scheme. Samantha: Understanding that a salary sacrifice is a contractual reduction to pay and not a deduction from pay has always been a challenge for employees and employers. This continues to be commonly demonstrated when an employee accesses statutory maternity pay and challenges the calculation of the 90% of average weekly earnings pay figure. The introduction of the national living wage has increased the number of employees who are also questioning why they can’t access such schemes from their employer or indeed who are now being removed from such schemes because the benefits that they have accessed via sacrifice, for example, childcare vouchers or pensions, now takes them below the legal minimum hourly rate. In your experience, were/are employers correctly calculating the cash equivalent of benefits for employees who had entered a salary sacrifice arrangement under which they could/can revert to their original higher salary at any time (i.e. where the Heaton v Bell principle was in point)? Claire: The large clients we process
mainly have a benefits officer that provides advice. They usually apply an annual benefits window during which employees can select the benefits and the amount they wish to sacrifice. The only changes we generally process outside this are changes to the number of childcare vouchers or increasing pension contributions. It would be unusual for these to change more than once a year per employee. The smaller employers that we look after don’t have benefits officers and often don’t offer the benefits via salary sacrifice because they don’t understand the rules behind the benefit. Richmal: I think the Heaton V Bell principle is not well known or understood in the payroll field as a whole, and therefore not applied in calculating the correct cash equivalent of benefits for a large proportion of employers for the purposes of section 62 of the Income Tax (Earnings and Pensions) Act 2003. Many companies are not aware of the difference in tax implications between an agreement to sacrifice salary (for which an employee can only stop if there is a ‘lifestyle event’) and an arrangement in which the benefit could be surrendered at any time, and the employee reverted back to their original salary. Samantha: Following the introduction of tax-free childcare vouchers an employee’s awareness of their pre-sacrificed and post- sacrificed pay levels appears to be more visible. This is largely because ‘notional’ salary amounts are commonly shown on a payslip, where previously only post- sacrifice pay levels were shown. This can lead employees to believe they have a far greater element of choice to revert to their previous pay amount – and at any time. This perception might be at odds with the wording in the contractual arrangement, which only adds to the confusion and thus increases the risk of error in calculations. In sectors where, however, use of sacrifice is commonplace, the ability to correctly apply the calculations are boosted by access to sufficient numbers of qualified and knowledgeable professionals who have a far greater understanding of the rules and the concept of ‘money’s worth’. Susan: The tax treatment of the payment made by Mr Bell was challenged and this led to the 1971 House of Lords’ ruling in Heaton v Bell 46 TC 211. It was ruled that
Mr Bell was still entitled to the same gross pay whether or not he had the car. Despite losing the case, Mr Bell and his employer probably did not realise the impact of the case. In making their ruling, the Lords set out, in broad terms, the prerequisites for what was until now (6 April 2017) termed by HMRC to be a successful salary sacrifice arrangement. We needed to see: a salary reduction (not a deduction) that was in writing, and had been implemented with some degree of permanence; and an agreement in place before the entitlement to the salary to be sacrificed occurred. HMRC issued guidance some time ago on when it would take the Heaton v Bell principle, and referred to a twelve-month period. Many employers adopted this with changes before that time only occurring after a lifestyle event. Rarely, therefore, did I see HMRC take this particular point up. n The concluding part of the roundtable report will appear in the October issue of the magazine. The questions featured comprise the following: ● Are you aware of employers changing or planning to change their employees’ benefits packages to reflect the optional remuneration rules from 6 April? ● What are your views on the extent of employer understanding of the implications of the changes? ● Based on your experiences to date, are all employers correctly calculating the cash equivalent of benefits caught by the new rules and correctly operating PAYE and National Insurance in respect of the amounts/benefits? ● In your opinion, are these changes fair in terms of taxation, given that employees who enter into an optional remuneration arrangement could end up having a greater income tax liability than another employee with the same employer who receives exactly the same overall remuneration package but does not participate in OpRA? ● To what extent do you think the new rules will curtail salary sacrifice/OpRA going forward? ● How will HMRC target resources to ensure compliance with the new rules? ● How if at all is HMRC’s delay in revising the design of the form P46(car) impacting employers, clients and employees?
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| Professional in Payroll, Pensions and Reward |
Issue 33 | September 2017
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