Posted by Nick Day on 20 Jul 2020
Salary Sacrifice Update
The UK tax treatment of Salary Sacrifice schemes changed from 6 April 2017, removing the advantage of using such schemes for many benefits. As we approach the end of the transition period on 5 April 2021, we look at the ways in which a salary sacrifice scheme can still work to your advantage.
In a salary sacrifice scheme, an employee contractually gives up some of their salary in return for receiving non-cash benefits from their employer. Where this is a tax-free benefit, the salary sacrifice reduces the salary that is subject to PAYE, saving income tax and NICs (National Insurance Contributions) for the employee and employer.
From 6 April 2017 the PAYE rules were changed so that PAYE would need to be operated on the benefit received from the salary sacrifice, being the higher of:
- The salary given up; and
- The value of the benefit received, calculated under the normal employment benefit in kind rules.
Whilst the tax-free benefits can still be provided to employees, in most cases the income tax and NIC benefits from using a salary sacrifice scheme to do so have been removed, as the salary given up is brought into tax anyway.
There are still certain benefits where the new rules do not apply, where a salary sacrifice scheme can still be beneficial:
- Payments into pension schemes.
- Employer-provided pensions advice.
- Workplace nurseries.
- Childcare vouchers and directly contracted employer-provided childcare that started on or before 4 October 2018.
- Bicycles and cycling safety equipment (including cycle to work).
In addition, certain salary sacrifice schemes set up prior to 6 April 2017 have continued to be dealt with under the old rules (unless varied or modified), but will fall within the new rules from 6 April 2021:
- Cars with CO2 emissions of more 75g/km
- School fees relating to the education of children whose parents work at that school (even if varied, renewed or modified for the same child and school)
Salary sacrifice schemes still have a place in remuneration planning, although their scope for beneficial treatment have been somewhat reduced. Of course, a reduced salary can have other impacts (for example on mortgage applications or earnings-related benefits), so care needs to be taken before entering into a salary sacrifice scheme.
If you would like any advice regarding the changes to salary sacrifice schemes or would simply like to discuss other ways in which we could help you or your business, please contact us on 01962 856 990 or firstname.lastname@example.org