The mutually beneficial nature of salary sacrifice has made it extremely popular among employers and staff alike. For years now, companies have been able to offer their workers an effective pay cut in return for providing them with a non-cash benefit, such as a company car, workplace parking, health checks, and so on.
Employers save on paying National Insurance contributions (NICs) on the sacrificed wages, while employees can lower their taxable income and reduce their NICs too; it’s an arrangement viewed by many as a win-win.
But the tax and NICs savings represent a cost to the exchequer at a time when there’s mounting pressure on the government to raise public spending. Consequently, in a bid to recover lost tax revenue and to address what the chancellor regards as the unfairness of some salary sacrifice arrangements, those participating in such schemes will, in his words, “pay the same taxes as everyone else”.
In March 2017, the government published the Finance Bill 2017, which included draft clauses relating to what it calls “optional remuneration arrangements”. This reveals details about how the new salary sacrifice rules will work.
The new measures will affect contracts involving salary sacrifice arrangements set up from 6 April 2017. Employees swapping salary for benefits will, in most cases, be required to pay the same tax as individuals who buy them out of their post-tax income.
Only a few politically-sensitive benefits such as pension saving, employer-provided pensions advice, employer-supported childcare, cycle-to-work schemes and ultra-low emission cars are exempt from the changes.
All other benefits, including most company cars, workplace parking, mobile phones, and employee discounts will be subject to Income Tax and Class 1A NICs. This will be on either the cash equivalent or the amount of salary sacrificed by the employee – whichever is greater.
There are transitional arrangements for employees who started a salary sacrifice arrangement before 6 April 2017. The benefits for those individuals will be protected until the end, modification or renewal of the contract, or until 6 April 2018, if that date is sooner. This excludes company cars, accommodation and school fees, for which the end-date is 6 April 2021.
Businesses that continue to run salary sacrifice arrangements will almost certainly see an increase in employers’ National Insurance liabilities, which could be significant for those with larger workforces.
“Some employers are still completely unaware of the implications of their actions – as well-intended as they are – when they allow staff to use salary sacrifice for many different types of benefit,” says Tony Müdd, divisional director, development and technical consultancy at St. James’s Place.
“Staff who use salary sacrifice could find themselves unwittingly paying more tax than they expected – and they may not know until it is too late. Business owners should clearly detail to their staff which benefits are affected and when the change will occur – if they haven’t done so already.”
No sugar coating
Clearly, the changes are causing challenges for many employers due to the short timescales for employee engagement and payroll changes. The reforms are likely to be particularly disruptive for employers that automatically include employees in salary sacrifice (allowing them to opt out if they wish), and for those that incorporate salary sacrifice schemes into the terms and conditions of employee contracts.
“I would suggest that those businesses review their policies as soon as possible,” says Müdd.
While pensions and childcare are exempt from the changes, the government has not given an exemption for employees who use salary sacrifice to increase their life insurance or income protection coverage. This will add a further burden on businesses that allow their employees to build on a basic level of employer-provided cover.
Employers should therefore continue to endorse the virtues of salary sacrifice for pension contributions, but inform staff that the removal of tax perks makes the offer of extra life cover – and most other types of benefit through salary sacrifice – much less attractive.
“Any business owner who is unsure of the new rules should speak to their adviser, who should be able to advise on tax and employee benefits,” suggests Müdd.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.