SALARY SACRIFICE – EXEMPTIONS AND LIMITATIONS
Prior to 6 April 2017, salary sacrifice schemes or “optional remuneration arrangements” as described in the Finance Act 2017, were used to be a great option for reducing tax implications. However, after the new regulations put forth by HMRC, only a handful of benefits are kept under the excluded exemption list.
What is salary sacrifice?
Employees usually give up or agree to a lower rate of gross pay in exchange for benefits in kind (BiKs) e.g. childcare vouchers from their employers through salary sacrifice arrangements.
Due to the increasing cost of salary sacrifice and its constant growth, HMRC expressed its worries at Summer Budget 2015, followed by Budget 2016 when it was considered to limit the advantages of salary sacrifice arrangements. Employers and employees were paying less Income Tax and NICs by replacing cash emoluments with benefits in kind.
How it works and who is likely to be affected?
All employees receiving non-cash benefits in exchange for lower gross pay and all employers who offer employees benefits in kind with cash alternative or through salary sacrifice arrangements are going to be affected by the new regulations.
The new measures will fix the taxable value of non-cash benefits offered through salary sacrifice arrangements along with limiting the Income Tax and employer NICs advantage offered through the same.
Post-April 2017, exemptions on benefits in kinds are no longer applicable to salary sacrifice schemes. However, there are handful benefits that are exempted and need not be valued or reported to HMRC for salary sacrifice arrangements:
- payments into pension schemes
- workplace nurseries
- employer provided pensions advice
- childcare vouchers and directly contracted employer childcare that started on or before 4 October 2018
- bicycles and cycling safety equipment (including cycle to work)
Employees enrolled in following benefits in kind before 6 April 2017, will only remain exempted until the end date of the agreement or until 5 April 2021, whichever is sooner:
- cars with CO2 emissions of more 75g/km
- school fees (even if varied, renewed or modified for the same child and school)
The arrangements will be subject to new rules if it’s varied, renewed or modified unless the change is due to the following:
- connected to an employee’s maternity, paternity, adoption or shared parental pay
- connected to an employee’s statutory sick pay
- damaged contract or other factors out of control of employer and employee.
Demerits to consider:
- Lower life cover due to the lower rate of gross pay
- Entitlement to state benefits and other contribution-based benefits such as Incapacity Benefit
- Entitlement to earning related benefits like Maternity Allowance and Additional State Pension
- Lower borrowing available mortgages
What is the new guidance?
All the advantages or benefits in kind associated with salary sacrifice arrangements will be valued at the higher of the cash foregone or the current taxable value mentioned in Part 3 of Income Tax (Earnings and Pensions) Act 2003. The said measures will be monitored and assessed through continued observation on the use of salary sacrifice schemes.