To date, salary sacrifice arrangements have been a popular way for employees to benefit from tax-free benefits without employers footing the bill. Under a salary sacrifice arrangement, the employee gives up an amount of tax-free salary in return for a benefit in kind. Where the benefit in kind taken in exchange is exempt from tax and National Insurance, the employee saves tax and primary Class 1 National Insurance on the salary foregone and the employer saves the associated secondary Class 1 National Insurance. Popular benefits taken in exchange for cash salary under a salary sacrifice scheme include childcare vouchers and mobile phones.
Salary sacrifice arrangements have been a victim of their own success. Concerned as to the cost to the Exchequer, the Government are seriously restricting the availability of tax exemptions for benefits in kind where the benefit in question is provided under a salary sacrifice arrangement. The restrictions take effect from 6 April 2017, with some protection for schemes entered into prior to that date.
Under the new rule, unless the benefit in kind taken in exchange is one permitted under the legislation, a benefit in kind provided under a salary sacrifice arrangement will be taxed on the higher of the cash foregone and the taxable value (i.e. the cash equivalent). Consequently, where a benefit would normally be exempt (so the cash equivalent value is nil), the benefit of the exemption is lost where provision is made under a salary sacrifice arrangement as under the new rules the employee would instead by taxed by reference to the cash given up.
Oliver enters into a salary sacrifice arrangement under which he gives up cash salary of £500 in return for a mobile phone. The mobile phone would normally be exempt from tax, but under the new rules the benefit of the exemption is lost and Oliver is taxed by reference to the cash given up of £500.
The new rules do not apply to the following benefits when made available under a salary sacrifice or flexible benefit arrangement:
- pension savings
- employer-provided pension advice
- childcare and childcare vouchers
- cycles and cyclists’ safety equipment under cycle to work schemes
Consequently, employees will still be able to enjoy any associated tax exemptions where the above are made available under a salary sacrifice scheme.
Start date – new contracts
The new rules will apply immediately to arrangements entered into on or after 6 April 2017.
Start date – existing contracts
Where a salary sacrifice arrangement was entered into before 6 April 2016, there is a period of grace before the new rules apply.
For existing contracts, the start date is the earlier of the date on which the contract ends, is modified or renewed and 6 April 2021, where the benefit taken in exchange is a car (other than an ultra-low emissions car), living accommodation, or school fees, and 6 April 2018 in all other cases.
Act before 6 April 2017 to preserve benefits
To continue to benefit from the existing rules as long as possible, contracts should be taken out, modified or renewed before 6 April 2017.
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