Significant changes to UK salary sacrifice schemes have now been implemented. Affecting both employers and employees, these changes essentially remove the tax incentives of many of the benefits in kind (BiK) offered under salary sacrifice arrangements.
With, the new salary sacrifice rules reducing the tax benefits of salary sacrifice schemes, here’s what small businesses need to know about the changes and how they affect employers and employees.
The new salary sacrifice legislation came into force on 6 April, 2017. There are grandfathering measures in place for some of the benefits offered under existing salary sacrifice schemes, but the change in tax treatment is having a significant impact on a wide variety of employee benefits.
As a small business, the benefits in kind you offer staff may play an important part of your company’s infrastructure – and in the professional lives of your employees. So, if you haven’t already got to grips with the new salary sacrifice environment, now is the time to do so.
What is a salary sacrifice scheme?
Millions of employees across the UK have salary sacrifice arrangements with their employers. A salary sacrifice scheme allows employees to forego a certain amount of their cash remuneration in exchange for ‘perks’ – or non-cash benefits – offered by their employer. These benefits can be varied, and include:
- Mobile phones
- Travel allowances
- Housing allowances
- Public transport passes
- Company cars
- Company laptops
- Educational stipends/school fees
- Gym memberships
- Enhanced health insurance/life insurance
How does a salary sacrifice scheme work as a tax saving measure?
Prior to April 6, 2017, benefits received through salary sacrifice schemes were tax free. In other words, when employees sacrificed some part of their salary for a benefit, such as a mobile phone or car, the money they paid would be exempt from the income tax and national insurance contributions normally due on their pre-tax remuneration.
Employers also benefited from salary sacrifice arrangements since their obligation to make National Insurance contributions (on the salary amount their employees sacrificed) was similarly removed.
Important salary sacrifice changes from April 2017
The 2017 salary sacrifice changes are an effort to redress the unfairness of a situation in which some employees receive the same goods and services tax free that others have to pay for with their taxed income.
The changes are also expected to boost government coffers: according to HMRC, salary sacrifice benefits in the new system are expected to bring an additional £1 billion in tax revenue by 2024.
Impact on small businesses
The impact of the new system will depend on what kind of salary sacrifice benefits you offer your employees. While the majority of BiK, like mobile phone contracts and company cars will now be subject to income tax, some are excepted from the legislation and remain tax-free. Tax free benefits still available to salary sacrifice schemes are:
- Employer-provided pension saving and pensions advice
- Contracted childcare and childcare vouchers
- Workplace nurseries
- Ultra-low emission (ULEV) company cars
- Cycle-to-work schemes
Employees with existing salary sacrifice arrangements are being given a grace period in which to adjust to the new regime – thanks to several transitional measures. Essentially, these ‘grandfathering’ provisions protect the tax and NI savings on two groups of benefits:
- Employees may retain tax savings on (non ULEV) company cars, school fees, and accommodation allowances, until those arrangements are renegotiated, or until the 6 April 2021.
- Tax savings can be retained on all other types of benefits until renegotiation – or until the 6 April 2018.
Salary sacrifice calculator
To understand the practical effects of the government’s new salary sacrifice legislation, it’s useful to explore sample benefits in kind, taxed under the old and new systems.
In this first example, an employer offers an employee a mobile phone contract benefit in kind (worth £100), as part of a salary sacrifice scheme:
- At the basic rate, the employee should pay 20% income tax , and 12% National Insurance, on the £100 cash value of the mobile phone contract.
- The employer would pay employers’ National Insurance of 13.8% on that cash value.
- Under the old salary sacrifice rules, the employee would have made a total saving of 32% (20% income tax and 12% NI saving), receiving the mobile phone contract at a cost of £68.
- The employer would have saved £13.80 in National Insurance.
- Under the new salary sacrifice system, the employee saves only on national insurance – and receives the mobile phone contract at a cost of £88.
- The employer saves nothing – and must pay the £13.80 NI contribution due on the value on the benefit in kind (£100).
Exempted benefits, such as pension contributions and childcare vouchers, are obviously calculated differently.
For example, an employer offers an employee a childcare voucher – still eligible for tax exemption under the new system – for a salary sacrifice of £200 a month. All the tax-saving benefits remain on the cash value of the vouchers:
- The employee saves £64 a month – a combined saving of 20% income tax and 12% national insurance.
- The employer also saves £27.60 a month in national insurance contribution (at a class 1 rate of 13.8%).
The future of salary sacrifice
Thanks to the reduced tax saving potential, some employers may be dissuaded from offering the range of benefits they previously did, but the new legislation doesn’t mean the end for salary sacrifice arrangements.
It’s worth remembering that employee NI contributions are not affected by the new legislation (only employer NI contributions), which means some degree of financial saving can still be made through salary sacrifice benefits.
It is also possible that employers may be able to offer their benefits in kind at a discount, so that employees still receive value for money from their salary sacrifice arrangement.
Reward schemes for employees have always been an important way for businesses of all sizes to attract and retain talent, and there are other ways to pass on savings to employees through salary sacrifice.
All else notwithstanding, bear in mind salary sacrifice isn’t the only way of rewarding employees: there is no legislation preventing employers offering practical perks like mobile phones, for private use, in arrangements entirely separate to a salary sacrifice scheme.
What do you need to do now?
For small businesses, the new salary sacrifice system represents a significant shake-up, with effects that could be felt more intensely than they would in a larger organisation which might have the resources to maintain the benefits it offers employees.
Although the old system is protected by grandfathering measures until April 2018, as a small business owner, you should be adapting to the situation now.
To avoid disruption to your business and employees, it is important you deal with changes to your salary sacrifice schemes clearly and efficiently. Your priorities should include:
- Identifying salary sacrifice schemes which are affected.
- Reviewing the protection offered to these schemes by transitional measures.
- Assessing the ongoing costs of salary sacrifice benefits to employees, under the new legislation.
- Considering the continuing feasibility of those benefits – or exploring alternative approaches to delivering them.
- Communicating details of new salary sacrifice arrangements to employees.
- Implementing any changes to salary sacrifice schemes prior to the April 2018 (or April 2021) deadline.
Obviously, the impact of the new regulation on exempt benefits (such as salary sacrifice pensions) will be minimal, but other types of arrangement, especially those involving high-value benefits – such as housing or health insurance – which may affect the lives of employees, should be revisited sooner rather than later.
Talk to your employees at every stage of the transition process: clarity and communication will ensure everyone understands the landscape, and will help shape the new system of salary sacrifice benefits you offer going forward.
This guide has been written exclusively for ByteStart by Simon Wright, Audit & Compliance manager at activpayroll.
Last updated - 15th August, 2017