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Salary Sacrifice: Changes to Tax Regulations Explained

June 29, 2017 Salary Sacrifice

As of April, employers and employees involved in so-called ‘salary sacrifice’ payment in kind arrangements face a new set of rules on tax.

Salary sacrifice describes any situation where employees agree to exchange monetary earnings for non-cash payments. It covers everything from pension contributions to company cars, childcare vouchers to mobile phone contracts. Such schemes have grown in popularity in recent years due to the favourable tax breaks they attracted.

However, in his Autumn statement last year, Chancellor Philip Hammond announced the government would be scrapping the majority of the tax benefits associated with salary sacrifice. Such arrangements were estimated to be costing HMRC millions of pounds in lost Income Tax and NIC revenue each year, and the government argued it was also disadvantaging workers who could only receive a cash salary.

As of April, new regulations brought Income Tax and NIC contributions for most non-cash payments into line with normal arrangements. This means that, for the first time, Income Tax and NIC are due on hundreds of items or incentives offered in place of cash, with just a handful of exemptions remaining.

What do I have to pay tax on?

Employers and employees must now pay Income Tax and NIC on anything offered as payment in place of cash, with the following exceptions:

  • Pension contributions
  • Pensions advice
  • Childcare vouchers
  • Workplace nurseries
  • Cycle to Work
  • Ultra low carbon emission cars (under 75 g CO2 / km).

Key benefits which will now be taxable include car parking, gym membership, training and mobile phones. The amount the tax calculation is based on will be either the value of the goods/service or the cash value of the salary not received – whichever is higher.

Certain types of payment in kind, such as school fees and accommodation, will remain exempt for four years, before coming into line with the new rules in April 2021.

When do I have to start paying?

Although the new rules came into force on 6 April this year, the government has allowed a phasing in period of 12 months, meaning all existing contracts containing a salary sacrifice arrangement will not be liable until they come up for renewal.

So, in practice, if you signed a contract agreeing to an exchange of salary up to 5 April this year, you have until the contract runs out before the new rules come into force. The cut-off date is 6 April 2018, at which point the government assumes all contracts will have been renewed.

How are the taxes paid?

Tax on non-cash salary payments has always been part of the revenue system. Some goods, like certain company car schemes and white goods, have long been taxable when offered in place of cash. The same P11D and P46 (Car) tax returns which have been used for these examples will continue to be used across the board.

In arranging taxes for 2017-18, the critical point for employers will be ensuring they use the right figures on payroll, once an existing contract ends and the new rules are triggered.