From 6 April 2017, new legislation applies to limit the tax and NIC advantages of salary sacrifice arrangements.
The overall theme of the legislation is to prevent employees being able to give up part of their salary in exchange for a tax free benefit in kind, or a benefit in kind which is valued at less than the cash given up. The PAYE and NIC savings for the employee are removed from 6 April 2017 and this is affected by them being liable to tax and NIC on the higher of the value of the benefit or the cash given up.
Although the media focus has been predominantly on the impact on salary sacrifice schemes, the legislation applies to what are termed ‘optional remuneration arrangements’. This therefore also catches arrangements whereby an employee is offered the choice of a benefit (i.e. a car), or a cash allowance in lieu of the benefit. If the employee takes the cash allowance, this will be subject to NIC and PAYE in the normal way as additional salary. If the benefit is chosen, and the taxable value of the benefit is less than the salary foregone, the value of the benefit will be whatever the value of the alternative cash allowance would be.
The new rules will affect any new or revised contractual agreements entered into from 6 April 2017: this includes a change, renewal (including auto-renewal) or modification of a current agreement. For agreements in place before that date, which continue to apply without change, the new rules will not take effect until April 2021 for cars emitting CO2 of more than 75g/km. Most other benefits under such schemes will be taxable from April 2018, with school fees and accommodation being taxable from April 2021.
There is an exemption from the new rules where the benefit provided is an ultra-low emissions car (emitting CO2 of less than 75g/km), pension contributions, childcare vouchers or bicycles.
Strangely, the rules do not affect salary packages offered to new starters, provided they do not have the choice over their starting package make up.
If you would like to discuss the impact of the new salary sacrifice rules on your employee remuneration packages, then please do get in touch.