Salary sacrifice changes

In the Autumn Statement 2016, the government announced major changes to salary sacrifice schemes that are due to take effect on 6 April 2017.

Salary sacrifice schemes are arrangements where an employee’s entitlement to cash pay is reduced by changing the terms of their employment contract. In return for the reduction, the employee will be granted non-cash benefits. Such a scheme usually carries with it tax benefits provided the benefits are exempt or partially exempt from tax and National Insurance Contributions (NICs). An example of such a scheme would be where in return for a £40.00 reduction in weekly wages, an employee is granted a £40.00 childcare voucher by their employer. As childcare vouchers up to £55 are currently exempt from income tax and employee NICs, the employee will not be charged tax on the £40.00 childcare voucher.

The government however will remove such tax advantages from April this year for the majority of salary sacrifice arrangements. The only non-cash benefits to still receive tax allowances will be:

  • arrangements relating to pensions (including advice);

  • childcare;

  • Cycle to Work; and

  • ultra-low emission cars.

Those arrangements already in place before April 2017 will be protected until April 2018 and arrangements for cars, accommodation and school fees will be protected until April 2021.

In light of the above, employers should begin to review any salary sacrifice schemes they have in place to see whether they would be affected by the changes.