Changes to the Taxation of
Salary Sacrifice Arrangements
Background
Salary sacrifice arrangements broadly operate by enabling employees to exchange part of their cash remuneration, on which PAYE and NIC is due, for non-cash benefits which may be wholly or partially exempt from tax and NIC. The resultant savings may be passed on to the employee, retained by the employer, or shared. The ability to take an element of remuneration in a different form can also help to incentivise and attract employees and is increasingly common in todays workplace.
The Chancellor announced in the Autumn Statement 2016 however that many of the tax benefits of salary sacrifice schemes are to be removed from April 2017, although there a number of exceptions to this and some transitional arrangements.
Details
Currently there are several benefits which can be provided tax efficiently as part of a salary sacrifice arrangement such as pension contributions, childcare vouchers, car parking, mobile phones and bicycles under the cycle to work scheme. Exchanging salary for any of these items can give tax savings subject to certain conditions being met.
From 6 April 2017 however the benefits of many salary sacrifice arrangements will be removed with the exception of the following:
- Employer pension contributions (including employer provided pension advice)
- Childcare
- Cycle to work schemes
- Ultra-low emission vehicles, those with emissions below 75g CO2 per km.
The changes mean that the benefit of the tax and NI saving on the sacrificed salary will be removed. Instead, going forward, employees will pay tax on the higher of the salary sacrificed or the cash equivalent of the benefit replacing it.
Employees with contracts for salary sacrifice arrangements which are already in place before 6 April 2017 have been granted additional time before the benefits are removed. Such schemes will not be subject to the new rules until 6 April 2018, or the date the existing contract is changed, renewed or ends if earlier. Anyone considering altering or revising an existing scheme therefore should do so before 6 April 2017 in order to benefit from the extensions available.
It is important to note that any such arrangement represents a variation to an employees contract of employment so professional advice must be sought in implementing a scheme. Both parties must also appreciate that salary sacrifice is a reduction of rather than a deduction from salary which must have some element of permanence. For this reason therefore there may be a knock on effect on an employees ability to borrow for example.
For the time being however salary sacrifice remains an attractive, and potentially tax efficient, way of attracting and retaining staff. For more information on the changes described above and about the savings which can be made, please contact our Tax Director Jenny Marks.
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