Government research into the use of ‘benefits in kind’ perks by employers has prompted experts to warn that tax breaks that apply to a number of these benefits could be reduced in the autumn Budget.
‘Benefits in kind’ are a non-cash benefit of monetary value that an employer can offer to an employee. Under current rules these benefits are taxed unless there is a specific exemption. The value of the benefit is added to the cash value of an employees’ salary and taxed accordingly.
Any potential changes would affect ‘benefits in kind’ that employers offer through salary sacrifice. In April 2017, the advantages of salary sacrifice were withdrawn for most ‘benefits in kind’ but stayed in place for pensions, childcare, ultra low emission vehicles and the provision of cycles and cycle safety equipment. For example, the Cycle to Work scheme kept its tax exemption status.
However, the research suggests that these remaining tax exemptions are in the chancellor’s sights.
The warning follows concerns raised earlier this week that the chancellor is considering reducing the tax relief available via pensions salary sacrifice schemes.
Consultancy firm BDO flagged the HMRC survey, titled ‘Research with employers on benefits in kind and expenses’, which examined how common it is for employers to offer ‘benefits in kind’.
The results showed these benefits were more commonly offered by medium and large employers. The most prevalent use was for workplace parking (39 percent), company cars (29 percent) and cycle to work schemes (23 percent). Just over a quarter (26 percent) of medium and large employers said they offered benefits in kind through salary sacrifice arrangements.
Caroline Harwood, head of employment tax at BDO, said: “You can understand why the chancellor might be interested in reviewing the tax reliefs for pensions salary sacrifice schemes. The most recent figures show that the cost of NI tax reliefs from contributions to, and benefits from, registered pension schemes reached £23.5 billion in 2023/24. Meanwhile the cost of income tax relief for registered pension schemes reached £28.5 billion in the same period.
“Previous chancellors have shied away from taking this ‘low hanging fruit’ because of the furore that changes to pensions tax causes – and because saving for retirement has generally been seen as something to encourage.”
But she said that “one subtle way” the chancellor could cut some of this cost would be by limiting the NI exemption to £2,000 to £5,000 of total salary sacrificed for all benefit types.
“However, such a change would still be unpopular and reduce incentives for employers to offer salary sacrifice schemes and for employees to make suitable provision for their retirement. It would also add new burdens on employers who would have to calculate the excess if people went over the threshold,” she added.
“Employees currently using ‘benefit in kind’ incentives through salary sacrifice schemes could also lose out if the current incentives were reduced. This could have a particularly big impact on those taking advantage of such schemes to lease electric vehicles – another arrangement previously encouraged in the context of the path to net zero.”
