Following on from the Autumn Statement delivered by the Chancellor of the Exchequer, Philip Hammond, on the 23rd November 2016 there were a number of important changes that effect Employee Benefits schemes especially salary sacrifice arrangements.
Salary sacrifice scheme work on the premise that the employee gives up a portion of their salary in exchange for a benefit. This is tax efficient for the employee as they do not pay income tax or national insurance on the salary that has been effectively given up. Employers do not pay national insurance on this either.
Prior to Autumn Statement employees enjoyed a diverse benefits selection including Health and Wellbeing, Technology including mobile phone and computers and restaurant discount cards to name but a few. However from 1st April 2017 this is all going to change. The rules for salary sacrifice have not changed but the breadth of benefits that qualify for this have been dramatically scaled back. The government and HMRC have agreed that only the following benefits are entitled to tax exemption on a salary sacrifice basis:
- â€‹Childcare Voucher
- Cycle to Work
- Ultra Low Emission Cars (Lâ€‹ess than 75 CO2 Emissons)
Any existing arrnagements outside of these benefits are going to be honoured until April 2018 if taken out before April 2017 except Car schemes. If you have ordered and have had your car delivered before April 2017 then your salary sacrifice will stay in pace until April 2021.
The other major change to Employee Benefits effects insurance contracts. From April 2017 Insurance Premium Tax is going to increase from 10% to 12%. This is a 100% increase from November 2015.
This will effect benefits such as private medical insurance and cash plan. The Government have not stipulated how insurers add this increase on and have said it is up to them how they deal with it. This can be by passing it onto their customers or taking the hit themselves.
This has lead to increased interest in Healthcare trusts as an alternative to Private Medical Insurance. The difference between a trust and Private Medical Insurance is that with the latter you set up a scheme with an insurance company and the premium paid by the company is based on the Insurers perception of the risk posed.
Healthcare Trusts differ because you agree a claims fund for your scheme and this money is paid into a trustee bank account. This money still belongs to the company and not the insurer. Any claims are administered and paid out of this fund. You are in effect having a third party administrator looking after and managing your claims fund. This way the claims fund does not attract insurance premium tax. the Third Party Administrator will charge a fee for managing the fund and this will attract VAT as it is a service.
There are more risks associated with Trusts especially smaller groups as you pay for what you use. If your claims exceed the claims fund then you have to top the fund to enable any extra to be paid. A standard full insurance private medical insurance scheme will pay whatever eligible claims come in and the price will be adjusted at renewal.
Conversely, if your claims are lower than the Trust claims fund then you still keep the difference. This does not happen with a full insurance private medical insurance scheme.
Medium to larger trusts minimise this impact by applying a Stop Loss Insurance. This is designed to limit the exposure of the company to excessive claims. Normally this is put at 120% of the claims fund but can be 100% or more depending on the requirement. The company is liable to top up the claims fund to the required stop loss point. once this is reached the Stop Loss insurance picks up the rest. As this is an insurance contract you will pay Insurance Premium Tax on that part of the premiums.
There are positives and negatives for both types of schemes.
Health Matters can help you decide what is the best arrangement for you and also how to manage and what to do next with any salary sacrifice schemes that are affected by the budget announcements.
James Henson Director
Health Matters (UK) Ltd
02476 516 096