Sarah Bradford explains new rules applying to salary sacrifice schemes from 6 April 2017.
The advantages associated with salary sacrifice schemes are considerably reduced once new rules come into effect from 6 April 2017.
What is a salary sacrifice arrangement?
Under a salary sacrifice arrangement, the employee gives up an amount of cash salary in return for a benefit-in-kind. Where the benefit-in-kind is exempt from tax and National Insurance contributions (NICs), under the current rules salary sacrifice arrangements are beneficial for both the employee and the employer.
There is no tax or NICs to pay on the benefit-in-kind. The employee saves tax and primary Class 1 NICs on the salary given up in exchange for the benefit, and the employer saves secondary Class 1 NICs.
Salary sacrifice arrangements are often used to take advantage of the tax and NICs exemptions available for childcare vouchers and mobile telephones.
Example 1: Salary sacrifice for a mobile phone: ‘Old’ rules
Marcus enters into a salary sacrifice arrangement under which he gives up £500 of cash salary in return for the use of a mobile phone provided by his employer.
The provision of the mobile phone falls within the terms of the exemption for employer-provided mobile phones, and is tax and NICs free. Marcus is a higher rate taxpayer, and in 2016/17 the arrangement saves him tax of £200 (i.e. £500 @ 40%) and employee’s NICs of £10 (i.e. £500 @ 2%). His employer saves employer’s National Insurance of £69 (i.e. £500 @ 13.8%).
Salary sacrifice arrangements can still be beneficial for the employee if the benefit is not exempt, as taking a benefit-in-kind rather than cash salary will generally move the NIC liability from Class 1 to Class 1A, saving the employee contributions at 12% or 2%.
New rules
The new rules apply from 6 April 2017 for arrangements entered into on or after that date. Where an arrangement is already in existence on 5 April 2017, the start date is delayed, either until 6 April 2018 or 6 April 2021, depending on the nature of the benefit.
Under the new rules, the benefit of any associated exemption is lost where a benefit is provided under a salary sacrifice arrangement or flexible benefit arrangement, unless the benefit is one of a limited range of protected benefits. Instead, the employee is taxed by reference to the higher of the cash foregone and the cash equivalent value of the benefit calculated under normal rules. Thus, where a benefit would otherwise be exempt (so the cash equivalent value is nil) under the new rules, if it is provided under a salary sacrifice arrangement, the employee would instead be taxed by reference to the cash given up.
Example 2: Salary sacrifice for a mobile phone: ‘New’ rules
Molly joins the same company as Marcus on 6 April 2017, and considers entering into the same salary sacrifice arrangement.
However, under the new rules, she would lose the benefit of the tax exemption if the phone was provided under a salary sacrifice arrangement, and would instead be taxed on the phone by reference to the cash salary of £500 given up.
Protected benefits
Certain benefits are protected from the operation of the new rules, and remain able to benefit from the associated tax exemptions when made available under a salary sacrifice or flexible benefits arrangement. The protected benefits are:
- pension savings;
- employer-provided pension advice;
- childcare and childcare vouchers;
- cycles and cyclists’ safety equipment under cycle to work schemes; and
- ultra-low emission cars.
Consequently, salary sacrifice arrangements continue to be potentially beneficial where the benefit taken in exchange is on the above list.
Existing arrangements
Where an arrangement is in place on 5 April 2017, there is a period of grace before the new rules bite.
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.
To preserve the advantages associated with salary sacrifice arrangements for as long as possible, enter into an arrangement before 6 April 2017.
Practical Tip:
To maintain the tax exemptions associated with benefits not on the excluded list, employers should look at offering employees arrangements whereby the benefit is provided in addition to salary, rather than under a salary sacrifice or flexible benefits arrangement (i.e. ‘salary plus’ rather than ‘salary minus’).
