In light of the new salary sacrifice rules which will be introduced next month, Vaneeta Khurana, National Head of Employment Tax at international accountancy and advisory firm, Mazars shares her thoughts on what the new draft Finance Bill will mean for employees and employers.
For quite some time now, the Government has been concerned with the way the provision of benefits has evolved. There is now a growing market for flexible benefits, and salary sacrifice arrangements have gained popularity with employers as they see the obvious benefits of using them as a tool for employee retention.
But many within Government fear that the rise of such benefits could create inequality between those using salary sacrifice to receive a benefit and those employees close to the National Minimum or Living Wage who are unable to participate in such arrangements. Coupled with the Government’s growing concerns surrounding potential loss of tax revenue, and employer’s National Insurance Contributions, it was only a matter of time before the Government made the decision to take action.
From April 2017, the Income Tax (Earnings and Pensions) Act 2003 will include new sections 69A and 69B and some consequential amendments in other sections. The changes are also extended to capture other combinations of benefits such as the provision of cash alternatives to benefits – the legislation now refers to ‘Optional Remuneration Arrangements’ (OpRA).
But what will these changes mean for employers and employees alike?
Under the new rules, the amount subject to income tax and NICs will be
the higher of the amount sacrificed or the benefit in kind value (the amount which is reported on employees’ forms P11Ds). But this subsequent value will now be subject to Income Tax and employer’s Class 1A NICs which is collected by HMRC via the P11D/P11D (b) process (or payroll where registered with HMRC) . That being said, it is not the Government’s intention to remove any existing Class 1 NIC savings on benefits provided by way of OpRA. A number of benefits will be affected by the introduction of the new rules but the main ones of note will be:
- Health Assessments
- Mobile Phones and other technology devices
- Car Parking
- Direct Product
One really interesting thing to come out of these new changes is the effect they will have on tech schemes. If an employee sacrifices salary in exchange for technology through their work, usually they pay for it over a period of time say for 2, 3 or 4 years, and pay tax, based on 20% of the market value at the time of purchase, under the ‘use of asset’ rules – this is where ownership of the technology remains with the employer during the contract
At the end of the contract, and when ownership passes to the employee, the tax due effectively takes into account the employee has paid 20% ensuring that they don’t pay more than 100%. It is still not clear whether this ‘off-set’ will be allowed under the new rules and if not, employees will be ‘double taxed’ which is against the spirit of the Government trying to ensure that people/ businesses pay the right amount of tax at the right time.
HM Revenue and Customs (HMRC) has produced some additional guidance with many examples of how the new legislation is intended to work, but with only weeks before the legislation comes into effect, there are still some areas where further clarification is required.
In conclusion, I think we’re moving towards what I would call ‘salary packaging’ rather than salary sacrifice. Now people are deciding how much of their overall pay package they want to pay for in salary and how much they want to take as an allowance towards benefits.
By using an allowance towards benefits, employees are essentially overcoming any changes in the law as they are gaining the same tax and national insurance advantages as they do now.
Here at Mazars, we provide a joined-up approach to help our clients. I am an employment tax specialist but we also have employee benefit experts.This allows us to approach each salary sacrifice case from two angles – from the employment tax point of view – and looking at how it applies to the benefits themselves. Such joined up thinking means we can help our clients review and plan for a strategy.
It is really important that employers communicate with their employees effectively and positively making sure they know the facts including: what will happen as a result of the new rules; what benefits will be affected; what the changes will mean for them financially and what the plan of action is.
It is also important to make sure employers speak to an expert in the area who will be able to help position employer benefits so that they still work or replace them with more attractive alternatives. Despite all the impending changes, there are a number of benefits in kind that still gain employee NIC advantages. The key is to look at what is available and decide which ones would be best to add to your offering.
A quarter of banking customers noted an improvement in customer service over lockdown, research shows
SAS research reveals that banks offered an improved customer experience during lockdown
This represents some good news for banks in an extremely challenging time, with 59% of customers also saying they’d pay more to buy or use products and services from any company that provided them with a good customer experience over lockdown.
The improvement in customer experience also coincides with a rise in the number of digital customers. Since the pandemic started, the number of banking customers using a digital service or app has grown by 11%, adding to an existing 58% who were already digital customers. Over half (53%) of new users plan to continue using these digital services permanently moving forward.
Brian Holden, Director, Financial Services at SAS UK & Ireland, said:
“It’s notable that in times of need customers value being able to communicate with their bank and place an even higher value on good customer service. A rise in the number of digital customers means banks can now reach a wider audience online, leveraging AI and analytics to offer a more personalised experience.
“There is work to be done, though. Even greater personalisation is needed if banks are to win over the 12% of customers who felt banking services deteriorated over lockdown. And this personalisation will need to get right down to a segment of one to properly reflect the unique circumstances some individuals now find themselves in due to the pandemic.”
While the number of digital users grew over lockdown, there is still a quarter (24%) of the banking customer base that have chosen not to make the switch to digital services.
Meanwhile, failure to offer a consistently satisfactory customer experience could prove costly for banks, with a third (33%) of customers claiming that they would ditch a company after just one poor experience. This number jumps to 90% for between one and five poor examples of customer service, so this just underlines how much retail banks can win or lose in these difficult times.
For more insight into how other industries across EMEA performed during lockdown, download the full report: Experience 2030: Has COVID-19 created a new kind of customer?
Swedish Bank Stress Tests in Line with Recent Rating Actions
The Swedish Financial Supervisory Authority’s (FSA) latest stress test results show major Swedish banks’ robust ability to absorb credit losses. The results support Fitch Ratings’ view that short-term risks have abated in recent months, and are in line with Fitch’s assessment of major Swedish banks’ capitalisation at ‘aa-‘, which was a factor when Fitch removed the ratings of Handelsbanken, Nordea (not covered by the FSA’s stress test) and SEB from Rating Watch Negative in September.
The FSA estimated about SEK130 billion of credit losses over 2020-2022 for the three largest banks (Swedbank, Handelsbanken and SEB) under its stress test. This represents about 220bp of their loans, or about 70bp annually. However, the banks’ pre-impairment profitability in the stress test could absorb credit losses of up to about 110bp of loans annually. Fitch’s baseline expectation is for credit losses below 20bp of loans in 2020 and 8bp-12bp in 2021.
Capital remained strong under the stress test. The average common equity Tier 1 (CET1) ratio fell by only 2.8pp (1.9pp if banks did not pay dividends) from 17.6% at end-June 2020. The capital decline was not driven by credit losses, which could be absorbed by pre-impairment profitability, but by risk-weighted asset inflation.
The three banks’ 3Q20 results showed that capital has been resilient despite the coronavirus crisis. The banks had a CET1 capital surplus over regulatory minimums, including buffers, of almost SEK100 billion (excluding about SEK33 billion earmarked for dividends). SEB had a CET1 ratio of 19.4% at end-September, Handelsbanken’s was 17.8% and Swedbank’s 16.8%.
The SEK130 billion credit losses under the latest stress test are lower than under the FSA’s spring 2020 stress test (SEK145 billion), which also covered a shorter period of two years. However, they are still larger than the actual losses incurred by the three banks during the 2008-2010 crisis. This is despite tightened underwriting standards by the three banks in recent years, including, in the case of SEB and Swedbank, in the Baltics, the source of most of their loan impairment charges in the previous crisis.
In its baseline economic forecasts, the FSA assumes a harsher shock to Sweden’s GDP in 2020 and 2021 (-6.9% and 1%, respectively) than Fitch’s baseline (-4% and 3.4%), although it assumes a similar recovery by end-2022. It also assumes real estate price corrections, which appears particularly conservative in light of a 11% housing property price increase over January to November 2020.
The ratings of Handelsbanken (AA), Nordea (AA-) and SEB (AA-) are on Negative Outlook due to medium-term risks to our baseline scenario. The rating of Swedbank (A+) is on Stable Outlook, reflecting significant headroom at the current rating level following a one-notch downgrade in April due to shortcomings in anti-money laundering risk controls.
Future success for banks will be driven by balancing physical and digital services
Digital acceleration due to COVID-19 has not eliminated the need for bank branches
Faster service (23%), smaller queues (26%) and longer opening hours (31%) are among customers’ biggest asks of their bank branch, new research from Diebold Nixdorf today reveals. But with 41% consumers saying they would be comfortable to engage with all banking services via an app, it is vital that banks respond to the full spectrum of customer needs – balancing and evolving their offerings on multiple fronts.
A third (35%) of customers say they will always want access to physical, in-branch banking services in some capacity and one in ten (10%) consumers will never bank predominantly online in the future. This demonstrates that there remains an important role for the services a branch provides. This role, however, continues to shift away from purely transactional banking:
A quarter (26%) value face-to-face advice when it comes to their banking needs
One in five (18%) seek advice on different products
17% want to speak to the staff or other customers.
Matt Phillips, Diebold Nixdorf vice president, head of financial services UK & Ireland, said: “The majority of banks have spent the last decade focusing on their digital strategies and investing in improving – or establishing – their online customer experience. However, the data shows that there is still an essential role for physical branches. Banks now increasingly face the challenge of continuing to provide customers with access to a range of physical and as well as digital services, giving them the flexibility to choose the best service for them at any given moment in time.”
When looking beyond the impact of COVID-19, planned branch visits by customers are expected to rebound to 28%, following a dip to 11% during lockdown. And when asked about the new services they’d like to see inside their bank, sixteen percent of respondents said more self-service machines would improve their in-branch experience.
Matt Phillips continues: “In a world that is fast evolving and where the future is digital, there’s no doubt that high street banks must, and are, responding to the needs of highly digital customers. But not every customer requirement is digital. There is still a strong need for physical bank branches and the interaction and services they offer, and striking this balance between physical and digital is where the industry must come together to provide solutions. For example, building a strong, leave-behind strategy is something we’re seeing across the board when banks have to close branches, ensuring customers have access to self-service machines to complete all their transactional needs.”
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