Among a raft of changes unveiled in Chancellor Phillip Hammond’s 2016 Autumn Statement was an overhaul of the tax treatment employee salary sacrifice schemes.
Arguing that the current system was “unfair”, Hammond announced that the favourable tax arrangements on certain salary sacrifice schemes will come to an end at the beginning of the 2017/18 tax year.
This change has a potentially wide-ranging scope for a lot of businesses, so it is important to have a good idea of what is changing for planning purposes.
What are salary sacrifice schemes?
Many employers in the UK offer their workforces the opportunity to sacrifice a part of their salary in exchange for a non-cash employee benefit.
Examples of salary sacrifice arrangements include cycle to work schemes, childcare vouchers and company cars.
Salary sacrifice schemes currently offer tax benefits to both employees and employers. Employees are not taxed or charged national insurance (NI) on the sacrificed salary, lowering deductions on their salaries.
Employers are also not required to pay NI on these schemes, minimising the national insurance costs.
What is changing?
Following the chancellor’s latest statement it appears that salary sacrifice schemes are about to become less tax-effective from the 2017/18 financial year.
From 5 April 2017, new employees signing up to salary sacrifice schemes will no longer be entitled to the same tax benefits.
Salary sacrifices will instead be taxed and charge NI in the same way as normal cash salary, which will push up the tax bills for employers and participating employees alike.
The current system will not be overhauled on every type of scheme however. While some types (such as mobile contracts, company cars and health screening checks) will lose their tax-free status on 6 April 2017, others will not.
Pension contributions, childcare vouchers, cycle to work and ultra-low emission cars will continue under the current system.
Importantly, the tax-free status will continue for employees who sign up to salary sacrifice schemes before 4 April until the end of the 2017/18 tax year.
Other schemes, such as those relating to school fees and accommodation will see no changes until April 2021.
Read our in-depth Autumn Statement 2016 report here.