There has been uncertainty about the relationship between flexible benefits funded through salary sacrifice since the Autumn Statement on 23 November 2016. We have summarised our understanding of the impact for Group Insurance below.
Please note that this is our current understanding and may be subject to change. The Finance Bill 2017 was published on 20 March 2017, and we are reviewing the final wording. We are also actively exploring ways forward with industry consultants, particularly with regard to Group Income Protection.
The Government announced in Autumn Statement 2016 that the Income Tax advantages for many benefits funded through salary sacrifice will be removed from 6 April 2017. This is defined as any benefit in kind with a cash alternative available to the employee.
This will affect two common methods of providing flexible benefits:
Flex up – the employee sacrifices salary to obtain the benefit
Flex down – the benefit is given to the employee but can be given up for extra salary
In many cases there is a minimum (“core”) benefit provided by the employer that cannot be reduced. The premiums for this element would not fall under the new rules.
The new rules are effective from the earliest of:
- The start, end, variation, renewal or auto-renewal of the contract, or,
- 6 April 2018
These changes come into effect immediately for new members after 6 April 2017.
The new rules will apply on an individual basis to scheme members. If a member changes their benefit level, for example following a life event, the new rules will apply to them at that point (if they do not already). To avoid running a scheme with groups being treated differently for tax, schemes should be reviewed at the earliest opportunity.
Will any Group Insurance policies be affected?
Yes, any policy funded through salary sacrifice could lose some of its tax advantages. Realistically, this is only likely to impact flexible benefit arrangements where there is a cash option available to the employee.
Group Life Assurance
Registered policies are governed by pension legislation and are exempt from this change.
Excepted cover for employees sits outside the standard pension legislation. Employee-funded benefits will be treated as a P11d benefit, and also be subject to employers’ National Insurance if funded through salary sacrifice.
Excepted Spouse or Partner Life Assurance is already treated as a P11d benefit and is likely to be broadly unaffected.
Group Income Protection
The salary sacrificed by the employee is a P11d benefit, and thus subject to taxation, and will be subject to employers’ National Insurance.
Typical Group Income Protection benefits are subject to Income Tax, and HMRC has advised this will continue to be true. Employees receiving Group Income Protection benefits will effectively find themselves taxed both on the premium and the benefit.
We would urge advisers to fully explore the value of this type of arrangement in light of the new legislation.
Group Critical Illness
Group Critical Illness is already treated as a P11d benefit and is likely to be broadly unaffected.
Benefit in kind revaluation
A consultation on reviewing the value of taxable benefits was announced in the Budget 2017. We will advise of any impact on Group Insurance products when the results of the consultation become clear.