Expert Blog

The politics of salary sacrifice

It’s hard to say for certain when politicians started getting interested in salary sacrifice schemes. Why? Because it’s hard to say for certain when anyone started getting interested in salary sacrifice schemes. They’ve definitely been around, in some form or other, for the past couple of decades. But there is no obvious Year Zero.

We can, however, identify the New Labour years and the Chancellorship of Gordon Brown as a time when salary sacrifice became a significant policy concern. Yet the concern wasn’t of the negative sort. Even though – as we described in the first post of this series – salary sacrifice keeps money in our pockets and out of the taxman’s, the Labour government initially did quite a lot to encourage it. An early scheme of theirs, called the ‘Home Computing Initiative’ and introduced in 1999, was typical of their overall approach. This helped workers to get computers and computing peripherals through their workplaces, without any of it being taxed at all.

Gordon Brown's Approach

The most famous of Brown’s salary sacrifice policies came several years later. In 2005, he introduced the employer-supported childcare scheme, which allowed parents to give up a portion of their salary in exchange for special vouchers for childcare. These vouchers were also exempted from tax – at least up to the value of £55 a week – so parents were faced with an easy choice. Either accept their full salary, pay tax on it all, and still have to fork out for childcare. Or forgo part of their salary, receive vouchers to pay for the childcare, and pay less tax. It was a no-brainer.

But what a Chancellor giveth, a Chancellor can also taketh away. The Home Computing Initiative was ended in 2006, but it took the financial crisis of 2008 for New Labour to really think twice about salary sacrifice. It was the following year when Brown, who had finally become Prime Minister, started talking about curtailing – or even terminating – the tax relief on childcare vouchers. With the budget deficit widening, he had cooled on the idea of allowing people to avoid giving money to the State.

In the end, the tax relief wasn’t phased out as Brown envisioned. People complained so vigorously against the proposal – Labour MPs amongst them – that the Prime Minister had to back down. As a compromise, different rates of relief were brought in for different bands of taxpayer. The more you earned, the less you got.

The anger that Brown faced was illustrative of a simple fact: people had come to rely on salary sacrifice, and they weren’t going to give it up without a fight. This may well have been because of changes elsewhere in the tax system. Throughout the New Labour years – as the Institute for Fiscal Studies details in this useful briefing note – more and more people were brought into paying income taxes and National Insurance, and the amounts they had to pay increased too. This would have made any consolatory policies, such as the childcare voucher scheme, even more attractive.

The Chancellor's Next Steps

There is now, of course, a different party in power and a different Chancellor in Number 11. But the same questions remain. With the budget deficit persisting, will George Osborne be happy to forgo revenues from income tax and National Insurance? Will he try to recoup them as Brown also tried, but failed, to do?

According to his latest Budget, the Chancellor is ‘concerned about the growth of salary sacrifice schemes,’ and is ‘considering limiting the range of benefits that attract income tax and NICs advantages when they are provided as part of salary sacrifice schemes.’ These limitations won’t, apparently, affect ‘pension saving, childcare and health-related benefits such as Cycle to Work’. Will they affect cars? Watch this space.

The first problem with these governmental warnings is that salary sacrifice is too entrenched in our economy to be reversed easily. The HMRC website has reams of guidance on it. Nearly 60 per cent of companies now offer it to their employees. It’s even mentioned in the documentation around Civil Service pay.             

What’s more, some salary sacrifice schemes will infuriate the Chancellor more than others. The childcare vouchers would have seemed like lost money to Brown precisely because they were: they were tax exempt, meaning that the Exchequer lost out totally on the tax revenues that the employee would otherwise have paid from their salary. But other salary sacrifice schemes, such as those involving cars, aren’t tax exempt. The Exchequer still loses out on the National Insurance and income tax that the employee would have paid, but it gains from the benefit-in-kind rates that are then imposed on the vehicle. These schemes are far less likely to be targeted.

What does it mean for employees?

Of course, these schemes leave the employee with some maths to do – in which situation will they be better off? With their salary or with the car? For most, the answer will be the latter, particularly if it’s an environmentally friendly one. This Government has moved to increase BIK rates for vehicles that emit more carbon dioxide. So, the greener, the better.

We shall investigate these considerations in future posts for this series. In the meantime, there’s little cause for worry. As it stands, salary sacrifice is a winner. It’s a brave – perhaps foolhardy – Chancellor who tries to change that.

 

- Sarah Hodgkin, Salary Sacrifice Development Manager at Hitachi Capital Vehicle Solutions

 

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