16 May 2017
The government has become concerned that salary sacrifice arrangements are being used in an abusive manner and so new rules are being introduced to limit the income tax and employer national insurance contribution (NIC) advantages where benefits-in-kind are provided through salary sacrifice arrangements (described in the legislation as optional remuneration arrangements).
The rules impose a notional cost on taxable benefits based on the value of the amount of salary given up if this is greater than the charge that would otherwise be due under the legislation. For most benefits which are subject to either a full or a limited tax exemption, the exemption is disapplied if the benefit is provided in conjunction with a salary sacrifice arrangement.
What is an optional remuneration arrangement?
For the purposes of the benefits code, an employee benefit is provided under optional remuneration arrangements if:
- the employee gives up the right (or a future right) to receive an amount of earnings in return for the benefit; or
- the employee agrees to be provided with the benefit rather than an amount of earnings.
Which benefits are affected?
The principle is generally the same. Where a benefit is provided under an optional remuneration arrangement, the greater of the cash equivalent or the amount foregone is treated as earnings when the benefit is provided. Benefits affected are:
- Cash vouchers
- Non-cash vouchers
- Credit tokens
- Living accommodation – new legislation creates a new ‘modified cash equivalent’ and it is the greater of this figure and the amount forgone which will be taxed
- Cars – where a car is made available and an alternative to the car is offered, then provided that the emissions do not exceed 75g/km, the new rules do not apply. However, in other circumstances the new rules will apply to the greater of a new ‘modified cash equivalent’ and the amount forgone will be taxed. A new 147A deals with classic cars, and numerous other consequential amendments are made
- Car fuel
- Vans – new legislation, again taxing the greater of a new ‘modified cash equivalent’ and the amount forgone
- Van fuel
- Cheap loans – again taxing the greater of a new ‘modified cash equivalent’ in new legislation and the amount forgone
- The general rules on the cash equivalent of loans
- The general tax exempt amounts. Where a benefit is provided by an optional remuneration arrangement, the exemption will no longer apply unless it is specifically referred to below
- Cycles and cyclists’ safety equipment
- Limited exemption for qualifying childcare vouchers
- Exemption of contribution to registered pension scheme
- Retraining courses
- Childcare: exemption for employer-provided care; and
- Childcare: limited exemption for other care.
Some existing rules e.g. the exemption for paid/reimbursed expenses already restrict relief where salary sacrifice arrangements are in place and these restrictions continue.
Start date
Generally, the changes apply for 2017/18 and subsequent tax years. However, arrangements for vouchers, credit tokens and cheap loans made before April 2017 will be protected until April 2018.
Pre-6 April 2017 arrangements for school fees, living accommodation, cars, vans and fuel will be protected until April 2021, meaning the changes will apply to 2021/22 and subsequent tax years.
If the terms of any pre-6 April 2017 arrangements are varied or renewed on or after 6 April 2017, the new rules apply from the day on which the variation is made.
Employers may wish to review their remuneration packages sooner rather than later to ensure that they and their employees are unaffected by these changes.
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