Salary sacrifice schemes allow employees to give up part of their salary in return for non-cash benefits from their employer.
Up until now, the schemes have been a ‘win-win’ for both employers and employees:
-Employees save because they are not taxed for the portion of money that they put towards their benefit.
-Employers save because they pay less in National Insurance.
The arrival of the Autumn Statement signals changes in the status quo.
Chancellor, Philip Hammond, announced today that he plans to restrict the tax-free benefits offered by salary sacrifice schemes.
The non-cash benefit will no longer come out of the employee’s pre-tax pay, meaning employees and employers who have opted-in to salary sacrifice schemes will be subject to tax and NI. The tax charges will be the same as those applied to cash income.
Pensions, childcare vouchers, cycle-to-work and ultra-low emission cars will be exempt from the changes, in a bid to encourage take up.
From April 2017, the following types of scheme will no longer offer tax perks:
Any arrangements in place before this time will be protected for a year (until April 2018). Long-term agreements for cars, accommodation and school fees will be protected until April 2021.
The Treasury are clamping down on this as the schemes are becoming too costly and the Exchequer is making significant losses on income tax and NI contributions.
The clamp down comes after an increasing popularity in Pay As You Earn requests, which have increased by ⅓ in the 5 years preceding 2015, costing the government £15 billion a year.
A 24-month mobile phone contract worth £1,000 would cost the Exchequer £321 for a basic rate taxpayer, or £426 if the employee is in the highest rate tax bracket.
Many employers are reliant on the salary sacrifice mechanism to fund key areas of benefit provision. The changes mean the agreement will no longer be financially advantageous for the employee, nor the employer. In fact, the move is set to cost employees and employers £85m in 2017 rising to an additional £260m by 2020.
The short timeline stated is also likely to pose a problem for employers who may have to rethink their benefits offering.
However, this doesn’t rule out salary sacrifice benefits altogether. As previously mentioned, there are valuable exemptions from the new regulations.
Also, although changes will take place as early as April 2017, employers with existing salary sacrifice arrangements will have until 2018 to plan, meaning the impact may well be more manageable that first thought. This also means that employers have 5 months to encourage employees to sign up for such schemes before the regulations are fully implemented. Struggling for ideas for a team Christmas present? Look no further!
Perkbox is the UK’s leading employee engagement platform. We offer alternative employee engagement solutions, as well as salary sacrifice schemes. If you’d like to find out more about how we can help you to reward and motivate your team, click here.
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