HMRC carry out periodic research into all aspects of taxation, but unfortunately, many of their research papers are rather esoteric in nature. That being said, our wonderful tax office claims that the results of their research enable them to collect information to allow them to carry out their basic functions to administer and collect tax, whilst also enabling them to improve and develop these functions.
All well and good you might think, however if you read between the lines of their more recent research papers, it is clear that a number of so-called perks of the tax system are undoubtedly under threat.
I do not intend to go through every income tax perk today, there are dozens of them, ranging from your employer supplying you with an electric car, down to claiming a tax refund for the cost of cleaning your work uniform. I have covered all aspects of these benefits multiple times in the past in various Blogs, however if you need more information, please me a message in the ‘Leave a Reply’ box below.
In today’s Blog I am looking at which income tax perks are clearly on HMRC’s radar and therefore most under threat. Recently, following the publication of several HMRC research papers, I have become more concerned, as the papers clearly show their direction of travel and which of the benefits, currently enjoyed by many of you, are being considered to be either withdrawn or reduced in scope/value.
Salary sacrifice
Salary sacrifice is a scheme whereby an employee gives up the right to some of his/her pay in exchange for something else, such as a larger employer’s pension contribution or a new bicycle under the cycle to work scheme. Unfortunately, in some instances, it can fall foul of working-time legislation, if the arrangement takes a worker’s pay below the national minimum/living wage rate applicable for their age.
The good news is that, if successful, the exchange has the result of reducing the pay that is subject to income tax and Class 1 NICs. This is a win for the taxpayer and in most cases, largely neutral (taxwise) to the employer, but as you can see below, aspects of the scheme are now under threat.
Optional remuneration arrangements (ORA’s)
In 2017 an amendment to the 2003 Income Tax Act was passed which introduced the concept of ORA’s. This meant that whilst you could still exchange part of your salary for something else, such as a bike, the new amendment replaced the blanket tax and NICs advantages with ‘special case & excluded exemptions’. The new ORA’s effectively restrict the value of such benefits, the main ones being:
- The cost of for electric and ultra-low emission cars (ULEVs) with CO₂ emissions of under75g per km
- The running costs of electric and ultra-low emission cars
- Bicycles and cyclists’ safety equipment
- Pension contributions by salary sacrifice and payments for pension advice
The recent research papers reveal that the tax office is not content with just reducing the value of such benefits, they are actively considering the removal of one or more of them, with pensions and cars being at the top of their hit list.
Electric and ULEV benefits
HMRC’s attack on the value of these benefits has already started, with Benefit in Kind (BiK) charges being introduced on 6th April 2024 for electric cars and ULEVs bought by way of salary sacrifice.
In her last budget, Rachel Reeves continued her assault on the value of these benefits, by raising the rate of the BiK charge to 3% wef 6th April 2025 and in addition, announced that it would continue to rise each year until 2030, when the BiK will be a minimum of 9%.
The tax office has also reduced the level of CO2 emissions which qualify a hybrid car to be a ULEV from <75/km to <50/km. This means than anyone who bought a ULEV under the old rules will see their BiK charge double overnight and by 2030, rise to an eye-watering 19%.
Salary sacrifice for pensions
Last month, HMRC published a paper on the attitudes and behaviours of employers towards salary sacrifice for pensions. This was undertaken on a small cohort of employers and then weighted to be reflective of the entire UK workforce. HMRC claims that their research was aimed at “understanding the experiences, motivations and attitudes of employers towards using salary sacrifice arrangements for pensions”.
As an addendum to the research paper, HMRC published a number of ‘what if?’ scenarios, that they actively looking at with a view to raising the tax take. The four main options under consideration are:
- Removing all tax and NICs exemptions for both employers and employees.
- Removing the NICs exemptions for employers but not employees.
- Removing the NICs exemptions for employees but not employers.
- Removing the NICs exemption for both employers and employees – so, the income tax saving would remain but all NICs benefits would be lost
What’s likely to happen next?
It is certain that the Treasury will look at these research papers by HMRC, which could then be used by the Chancellor in deciding which tax reforms she could consider for future years in order to raise the tax take. There is however the issue of her potentially basing a decision on flawed data, as the research paper data was only based on a very small sample of employers.
Our Chancellor could not survive another major policy climbdown and with most accounting bodies believing that HMRC’s research conclusions are fundamentally flawed because of the low numbers of businesses sampled, she really needs to commission much wider research if she is ever to consider a further cut in the value of tax perks to help fill her growing ‘black hole’.
Accountant’s view
There is no doubt that the self-imposed straitjacket that the deadly duo of Kier & Rachel have adopted of not raising Income Tax, NIC’s or VAT, has left them with a big problem. They are now desperately looking at any areas that could potentially raise more tax to fill their ‘black hole’, that will not result in yet another revolt by their backbenchers.
