For the past few years, salary sacrifice schemes have been a really popular way to reward staff. Employees could have tax-free benefits, and there’d be no tax charge for the employer either. However, it’s all changing.
What’s happened so far?
In a salary sacrifice scheme, an employee gives up an amount of tax-free salary in return for a benefit in kind.
For many benefits, the employee could save PAYE and primary Class 1 National Insurance on the value, while the employer could save the relevant secondary Class 1 National Insurance. Therefore, it was a win-win situation for employee and employer.
Popular benefits under a salary sacrifice scheme included childcare vouchers, car parking, and mobile phones.
The Government has decided these schemes are too good, and the tax savings are too much! Therefore, they’re being restricted from 6 April 2017.
What are the new rules?
Unless the benefit is allowed under the revised rules, there will now be tax and National Insurance payable. This will be calculated on the higher of the cash sacrificed and the taxable value (ie the cash equivalent).
Dave enters into a salary sacrifice arrangement. He gives up a cash salary of £1,000 in return for a mobile phone. Previously, the mobile phone would have been exempt from tax. However, from 6 April 2017, Dave will be taxed on the £1,000.
What can I still have tax-free?
The new rules don’t apply to some benefits. You can still have the following without any PAYE or National Insurance charge:
- pension savings (including pension advice)
- childcare and childcare vouchers
- ultra-low emission cars
- cycles and cyclists’ safety equipment under cycle to work schemes
When does this start?
The new rules will apply immediately to arrangements entered into on or after 6 April 2017.
Where a salary sacrifice arrangement was entered into before 6 April 2017, the tax benefits are protected. The dates for the protection depend on the type of benefit. The benefits are protected until the earlier of:
- The date on which the contract ends; or
- 6 April 2021 if the benefit is:
- a car (other than an ultra-low emissions car)
- living accommodation
- school fees; or
- 6 April 2018 for any other benefits.
What can I do to keep the tax-free benefits?
To keep the tax-free benefits as long as possible, you should consider taking out salary sacrifice contracts before 6 April 2017.
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Added by Jon Davies
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