Tax Changes to Salary Sacrifice Schemes – What do you need to know?

The Government announced in November 2016 that the tax incentives on many salary sacrifice schemes are to be removed from April 2017, in much the same way as the tax advantages of salary sacrifice for on-site canteen facilities were removed in 2011.

Which schemes will be affected by the loss of tax incentives?
There is no prescriptive list, but here are some examples of schemes affected:

• company cars (unless they're ultra-low emission vehicles);
• work-related training;
• car parking near your workplace;
• health screening;
• mobile phones;
• gym membership;
• school fees.

Which salary sacrifice schemes will remain?
The following schemes are exempted from the changes announced and so will continue to have the tax and NIC advantages as before:

• pension contributions;
• childcare;
• cycle-to-work schemes;
• ultra-low emission cars (CO2 levels 0-75 g/km).

Additionally, HMRC has announced there will be no change where salary is sacrificed in return for intangible benefits such as additional annual leave or flexible working hours.

What about existing schemes?
Any arrangements that are already in place before April 2017 will be protected until April 2018, with arrangements for cars, accommodation and school fees benefitting from protected status until April 2021.

While the overall scheme may be in place before this date, the legislation will preclude new joiners after this date obtaining this protected status. Also, if an employee currently has child care vouchers provided through salary sacrifice then looks to additionally take up private medical benefit (or even a car scheme) after April 2017 then only the pre-existing arrangement would be protected.

I provide benefits such as car parking and health screening but not through salary sacrifice. How do the rules affect me?
Provided the benefits are not offered as part of any salary sacrifice or flexible remuneration plan then the tax position will be unaffected by these changes.

We offer the option of employees of receiving a cash allowance instead of a company car. Is this included?
The definition of optional remuneration arrangements will cover salary sacrifice in both cases where an employee is offered the alternative of a car or cash allowance. Where a company car is provided and the cash alternative is available then the employee would pay tax at the higher of the cash allowance or the car benefit.

What exactly happens in April 2018 if I carry on as before?
From April 2018, on non-protected benefits provided through salary sacrifice, you will need to report the benefit on form P11D based on the higher of the cash forgone or the current taxable value of the benefit in question. The employee will therefore suffer tax through the normal P11D process (e.g. adjustment of tax code) and the employer will pay Class 1A NIC on the benefit in question.

Where the intent of the sacrifice is to allow employees to obtain benefits at lower rates than they could obtain personally (e.g. gym fees at corporate rather than personal rates) then the arrangements may still have financial advantages to the employee despite any potential tax advantages being lost.

What should employers do?
If you are an employer that provides salary sacrifice benefits to your workforce, you may have a difficult decision to make as to whether or not to continue with the arrangements without the tax advantages. As the changes are staggered for certain existing schemes, you may want to look at a clean break policy, stagger changes to fit with the tax changes or merely manage the additional tax and NIC costs.

Conversely, there is a still a window where employees not currently part of a salary sacrifice scheme are able to join before the end of the tax year and still obtain benefits for a specific period of time depending on the scheme in question.

If you wish to discuss any aspect of these changes further then please do not hesitate to contact a member of our Employers’ Support team.

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