In his Autumn Statement speech, Chancellor Philip Hammond announced significant changes to the tax treatment of certain options offered under salary sacrifice arrangements. Here we provide an overview of the changes.
Salary sacrifice: an overview
Salary sacrifice allows employees to exchange a portion of their cash pay in return for non-cash benefits-in-kind (BiK). Depending on the BiK, the effect of such arrangements is often to reduce the amount of tax and employee and employer national insurance contributions (NICs) due on the employee's remuneration.
Those employees who wish to opt out of a salary scheme are required to have their contract amended by their employer. Staff members' contracts must clearly outline their cash and non-cash entitlements.
Meanwhile, employers have a duty to report any non-cash benefits to HMRC at the end of the tax year. These must be included in the relevant sections on the P11D form.
From April 2017, the tax and employer national insurance advantages of salary sacrifice schemes will be removed in an effort to 'promote fairness in the tax system'. As a direct result of this, employees swapping salary for benefits will be required to pay the same tax as individuals who buy them out of their post-tax income.
Under the government's new rules, certain arrangements will no longer offer tax and NIC benefits. These include:
- Cash and non-cash vouchers
- Living accommodation
- School fees
- Cars (excluding ultra-low emission cars) and fuel
- Vans and fuel
- Beneficial loans.
However, some benefits will remain in place unaffected. These include:
- Pension contributions and arrangements (including pensions advice)
- Childcare vouchers
- Workplace nurseries
- Cycle to Work schemes
- Ultra-low emission cars with CO2 emissions of up to 75 g/km.
At the Autumn Statement, the Chancellor outlined the government's intention to protect certain arrangements: plans put into place before April 2017 will be protected until April 2018, and those made for cars, school fees and accommodation will be protected until April 2021.
Will the changes affect me?
The changes to salary sacrifice may have a significant impact on your own arrangements; under the new rules, most schemes will be affected. Both employers and employees may therefore wish to rethink their salary sacrifice plans.
Employees may still be eligible to join salary sacrifice schemes up until the 6 April 2017 deadline. However, from this point on, remaining in such a scheme may result in an additional tax bill.
Employers, on the other hand, will no longer benefit from employer NIC savings, and may be required to review staff members' contracts, as salary sacrifice schemes may be incorporated into the terms and conditions of employee contracts.
For more information on the changes to salary sacrifice, please contact us.