Spring Budget 2017 – Salary Sacrifice Penalised

Benefits, such as private medical insurance and pension contributions, are often provided to employees by way of a salary sacrifice arrangement; an employee will agree to reduce the amount of their salary in exchange for the provision of benefits.

The advantage of doing this is that some of the benefits are not taxable when they are received by employees and there can be a significant employer NIC saving where an employee is ‘buying’ benefits out of his or her pre-tax salary.

In the Autumn Statement, the Chancellor announced that most salary sacrifice arrangements would no longer be effective.

The Budget documents confirm that Finance Bill 2017 will legislate that salary sacrificed in exchange for the provision of benefits will be taxed as if they had been paid in cash.  There are some transitional provisions:

  • Salary sacrifice arrangements that were entered into before 6 April 2017 will remain effective for tax purposes until 6 April 2018; and
  • Salary sacrifices for cars with CO₂ emissions above 75g/Km, accommodation and school fees that were entered into before 6 April 2017 will remain effective until 6 April 2021.

As announced in the Autumn Statement, salary sacrifice will remain effective for:

  • pension contributions and pension advice;
  • childcare vouchers;
  • work-place provided childcare and nurseries;
  • cycle to work; and
  • cars with CO₂ emissions of less than 75g/Km.

The key point for employers will be to ensure that changes are not made to existing salary sacrifice arrangements, which could accelerate the point at which the changes to their tax treatment will ‘bite’.