Salary sacrifice schemes are offered by employers to their staff as part of a voluntary benefits programme. They help create a more flexible employee benefits package and are used by companies of all sizes to help drive better employee engagement. A key part of a strategy for retention, salary sacrifice schemes can benefit both employers and employees.
By offering a wide variety of additional employee benefits companies can enhance their employer brand and further engage existing employees.
A salary sacrifice arrangement is an agreement reducing an employee’s salary in exchange for a non-cash benefit. Quite simply you give up part of your salary for a non-cash benefit, such as childcare vouchers or increased pension contributions. Once you accept a salary sacrifice your overall pay is lower resulting in lower tax and national insurance contributions.
As an employer you can set up a salary sacrifice arrangement by changing the terms of your employee’s employment contract. Your employee needs to agree any changes made within their contract.
The most popular salary sacrifice schemes are cycle to work, childcare vouchers, car salary sacrifice, home technology salary sacrifice, holiday trading and pension contributions.
However a salary sacrifice cannot reduce an employee’s cash earnings below the national minimum wage rates. Changes to the scheme defined in the Finance Bill 2017, state some of these salary sacrifice arrangements entered into after 5 April will cease to have income tax and national insurance advantages, although the government has confirmed that a limited range of benefits will not be affected.
Those which continue to benefit involve pension contributions, childcare, cycle to work and ultra-low emission vehicles – those with emissions of 75g/km or less. There will also be some transitional relief available.
The April 2017 Finance Bill unveiled new rules seeking to:
• Define a new class of benefit provided through an ‘optional remuneration arrangement’.
• Impose a notional cost on benefits based on the amount of salary surrendered, irrespective of the usual benefit-in-kind rules.
• Apply income tax and class 1A employer’s National Insurance contributions to this notional cost.
Specifically, the draft legislation defines:
Type A salary sacrifice arrangements – here the income tax charge applies on the higher of the salary sacrificed and the value of the benefit (using the standard benefit-in-kind rules) and Type B cash alternative arrangements – here the tax charge applies on the higher of the benefit value and the cash alternative.
What does this mean for employees?
For type A arrangements, Those affected the most are the ones whose benefit schemes would previously have been exempt, such as salary sacrifice arrangements for workplace car parking or health screening. Under current rules, these would be exempt from income tax and National Insurance contributions. Those benefits provided by salary sacrifice arrangements after 5 April 2017 are subject to changes in income tax and national insurance charges.
The most common type B arrangements affected involve those in which the employee chooses between a car cash allowance or a company car – particularly if an employee chooses a car with lower CO2 emissions (creating a low benefit-in-kind) instead of a relatively high car cash allowance.
Even so, many arrangements haven’t been affected. These include type A arrangements in which the pay sacrificed is equal to the cost of the benefit provided, for example private medical insurance or when pay is forgone for an intangible benefit such as holiday trading.
In terms of transitional relief, there are grandfathering* provisions which apply protection to:
- All arrangements that were already in place before 6 April 2017 – these are protected from the new rules until 5 April 2018; and arrangements involving cars, vans, fuel, living accommodation and school fees are protected until 5 April 2021.
- Renewals or variations made on or after 6 April 2017 (with limited exceptions) haven’t benefitted from this protection and the new arrangements were subject to income tax and National Insurance contributions immediately.
*A grandfather clause (or grandfather policy) is a provision in which an old rule continues to apply to some existing situations while a new rule will apply to all future cases. Those exempt from the new rule are said to have grandfather rights or acquired rights, or to have been grandfathered in.
If you have any questions on salary sacrifice please contact your employer or HMRC here.