Salary Sacrifice arrangements will lose protection
Following the scaling back of tax and National Insurance Contributions (NICs) relief on salary sacrifice arrangements in April 2017, certain existing salary sacrifice arrangements (save for a few exceptions) will now only be protected until October 2018.
Why does it matter?
Under the Finance Act 2017, an optional remuneration regime was introduced with effect from April 2017. That regime restricts the benefits that will continue to benefit from tax and NICs relief if provided through a salary sacrifice arrangement. The only benefits that will continue to benefit from such advantages are:
- enhanced employer pension contributions
- childcare benefits
- equipment provided under the cycle to work scheme, and
- ultra-low emission cars.
While the restriction applies to optional remuneration arrangements entered into on or after 6 April 2017, any existing salary sacrifice arrangements that employees are already locked into will be protected until October 2018 or, in the case of cars, accommodation and school fees, until 6 April 2021 (unless the arrangement is ended, varied or renewed (including auto-renewal) before then).
The taxable value of the benefit will be the greater of the salary sacrificed or the cash value of the benefit.
What action should you take?
- Assess how benefits you offer currently to employees under an optional remuneration arrangement will be impacted.
- Decide how these benefits will be dealt with going forward – there may be certain advantages in having the benefit which outweigh the disadvantage of the benefit being taxable. For instance, death in service benefits provided under a separate insurance policy do not count towards whether someone has exceeded their pension lifetime allowance, but are a taxable benefit.
- Communicate any proposed changes to employees if the employee’s tax liability will increase as a result of the optional remuneration changes.