Since 1 April 2017, certain benefits offered under any new salary sacrifice scheme by employers have become subject to higher income tax and NIC charges. Although, in the press, this has been heralded as the end of salary sacrifice, this is not the full picture and such arrangements could still result in savings for the employee.
What is salary sacrifice?
Salary sacrifice arrangements involve an employee giving up their contractual right to monetary remuneration in exchange for a non-cash benefit. Providing the arrangements are legally effective there can be tax and national insurance savings.
What has changed?
With effect from 6 April 2017, most benefits provided through salary sacrifice schemes are now subject to income tax on the employee on the higher of:
- the amount of salary sacrificed; and
- the taxable benefit value.
There are some benefits, however, which are unaffected by the change in rules and the employee can continue to receive tax relief on the amount of salary sacrificed and not taxed on the benefit. These exceptions are:
- pension contributions;
- childcare vouchers;
- cycle to work schemes; and
- ultra low emission vehicles (i.e. cars with CO2 emissions of less than 75g/km).
There are some transitional rules such that the changes will not apply to existing schemes until April 2018. In addition, existing schemes for cars, accommodation and school fees will not be subject to the new rules until April 2021 (unless the scheme is renegotiated or revised before this date).
What impact will the changes have?
For most benefits other than those listed above the change in rules will result in no income tax savings for the employee nor national insurance (NI) savings for the employer. The employee could, however, still benefit from NI savings on the salary sacrificed.
The biggest tax impact will be for benefits that would have previously been exempt, such as provision of a car parking space at, or near, the workplace. If provided via salary sacrifice previously they would have been exempt from income tax and employers NI, going forward they would now be taxable on the amount of salary sacrificed.
Examples
No change - pension contributions
An employer pension contribution is provided to an employee who is a basic rate taxpayer giving up £1,000 of salary.
Employee – The employee would save £200 in income tax and £120 in NI giving total savings of £320.
Employer – The employer’s NI bill would reduce by £138.
The tax benefits of salary sacrificing pension contributions are unchanged.
Exempt benefits – car park
A car park space is provided to an employee at, or near, their workplace who is a basic rate taxpayer and gives up £500 of their salary.
Employee – The employee would save £60 in NI but would be taxed on the £500 salary sacrificed.
Employer – The employer will pay Class 1A NI on the £500 salary sacrificed so there would be no saving.
Prior to the change in rules income tax savings and employer’s NI could also have been saved. If the car park space was offered in addition to the employee’s salary there would be no tax or employer’s NI due as it is an exempt benefit, but the employee would be subject to NI on the salary not sacrificed.
Taxable benefits – company car
A company car is provided to an employee who sacrifices £5,000 of their salary in return for a company car with an annual taxable benefit of £4,000.
Employee – The employee would save £600 in NI but would be taxed on the £5,000 salary sacrificed as this is higher than the benefit amount.
Employer – The employer will pay Class 1A NI on the £5,000 salary sacrificed so there would be no saving.
Prior to the change in rules it was possible to take a higher salary sacrifice in exchange for a lower emission car which had a lower taxable benefit. This resulted in some tax and NI savings e.g. on the £1,000 difference in the example above.
All is not lost
Salary sacrifice is still available, without change, for some of the core benefits provided to employees such as pension contributions and childcare vouchers. There are also other drivers to offering benefits via a salary sacrifice other than tax. For example, many benefits offered through salary sacrifice may have already been subject to tax and NI but may be attractive as they offer discounts for employees.
If you would like any advice on how the change in rules could affect existing salary sacrifice schemes or if you would like to discuss how salary sacrifice could work for your business, please get in touch with our tax team on 01242 237661.