What is Salary Sacrifice?
The basic idea of Salary Sacrifice is to structure an employee’s compensation in a way that allows them to achieve a tax saving that wouldn’t be available if the employee was simply remunerated by salary alone. This is achieved by the employee agreeing to a reduction in their taxable gross salary (and a corresponding reduction in the PAYE and Class 1 national insurance) in return for the provision of a benefit which has a lower tax cost attached to it.
Salary Sacrifice started life as something mirroring a rebel with a cause, whilst its introduction led to a significant reduction in PAYE and national insurance received by the treasury, the viewed tax ‘sacrificed’ by the government was for the greater good.
The greater good for Salary Sacrifice being a rise in the contributions to employee’s private pensions, cycle to work schemes which created a healthier population and reducing the number of cars on the road, or contributions to charity.
However over time the rebel lost its cause, salary sacrifice started to be used to provide benefits to employees such as company cars, which don’t have the same ‘greater good’ attached to them. In more recent times, we’ve seen Salary Sacrifice being pushed to it limits by Umbrella companies using Salary Sacrifice as a means to pay expenses.
Legislation already exists to restrict the use of salary sacrifice for expenses from April 2016, and our factsheet has more detailed information on the new legislation in place for these arrangements http://www.francisclark.co.uk/files/documents/original/160804123116-FCExpenseexemptiontoreplcedispensationsRC.pdf
Going further with the restrictions, the chancellor’s announcement in the Autumn Statement was made in an effort to reign the rebel in and restrict the use of tax efficient Salary Sacrifices to only those benefit that the government believes contributes to a greater good, namely:
• Pension contributions
• Cycle to Work
• Ultra-low emissions cars
All other salary sacrifice arrangements entered into from April 2017 will be ineffective as a means of reducing an employee’s tax and national insurance.
There will be some grandfathering provisions within the new legislation for arrangements entered into before April 2017. Arrangements relating to car, accommodation and school fee benefits will be protected for up to four years, and all other arrangements are protected for a year.