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Salary Sacrifice changes post April 2017
10 February 17 | By: Jas Jhooty
Finance Act 2017 introduces changes in taxation which would apply when benefits are provided by means of salary sacrifice arrangements that will come into effect from this April.
Salary sacrifice arrangements are where an employee signs a contract with their employer to give up part if their salary in exchange for non-cash benefit provided by the employer. By sacrificing part of their salary the employee enjoys the grossed up value of the sacrificed money including the tax & NIC that would have been payable if that salary had been subject to payroll. The employer also makes a saving on their 13.8% secondary NIC. The money can then be used by the employee to purchase non-cash benefits that suit their personal lifestyle. As such salary sacrifice arrangements have become a key component of remuneration policies.
The Government was concerned that the perceived increase in take up was creating an uneven playing field between employees who worked for larger firms (who tend to adopt such schemes) and those employees who work for smaller firms who do not. For this spurious reason new legislation has been introduced to remove the tax advantages of certain types of salary sacrifice schemes.
Employers do not need to do anything if their employees are sacrificing salary only for pensions, pensions advice, childcare vouchers, workplace nurseries, directly employer contracted childcare, cycle to work or cars with emissions of, or under, 75 g CO2 / km. If employees are sacrificing salary for anything other than these benefits, then employers need to use the new rules.
From 6 April 2017, all other benefits provided in conjunction with salary sacrifice (even tax-exempt ones like mobile phones) would be subject to the new rules. A new term, “Optional Remuneration” has also been defined where an employee is offered in their contract a cash alternative to a benefit such as a company car. Such arrangements will also be caught under the new rules.
New rulesWhere an employee enters into a salary sacrifice for a non-exempt category after 5 April 2017 the tax and Class 1A NIC charge will be based in the greater of :
- The amount of the salary that has been sacrificed, or
- The existing benefit-in-kind value
There will not be a Class 1 NICs liability, unless one already exists on the benefit (such as in the case of vouchers).
Employers and employees are still free to use salary sacrifice, but with the tax and Class 1A NICs advantages removed.
Where an agreement is in place prior to 6 April 2017 the tax & NIC treatment will be protected for a specified period. The length of this period will depend on the type of benefit-in-kind that is provided under the salary sacrifice arrangements. In such circumstances the timing of the changes will be as follows:
a) Apart from those benefits-in-kind listed in point b) below, the earlier of when the salary sacrifice arrangement is renegotiated, revised or reviewed and 6 April 2018;
b) For company cars (with CO2 emissions above 75 g/kms), accommodation or school fees, the earlier of when the salary sacrifice arrangement is renegotiated, revised or reviewed and 6 April 2021.However these transitional rules will come to an abrupt end if one of the following events occurs before the end of the transitional period:
- The agreement is changed or modified
- The arrangement ends
- The arrangement is renewed
This includes instances where employees make their lifestyle choices on which benefits they wish to flex during the annual window to change their selections. The way the legislation is written the transitional rules would also appear to end early when someone receives a payrise or a promotion.
However the transitional rules will remain in place in circumstances that are beyond the control of either party eg accidental damage or the employee commencing SSP, SMP, SPP,SAP etc.
Impact on employers
Employers need to review the contractual position to identify which employees will be affected and from what date the new rules are to apply from. There will be an inevitable financial impact on the business and affected employees, so an effective communication strategy will need to be implemented.
Consideration should also be given on how to monitor the position relating to new starters post 5 April 2017 and how to practically administer two sets of rules.
How emTax can help
As specialists in employment taxation we understand better than most the effect this new legislation will have on your organisation.
We have extensively re-written our Benefits & Expenses Training package this year to fully explain how this new legisation will impact you.
If you think we can further help you to understand and assess the implications of these changes for your organisation, please do not hesitate to contact us.