For those that are unaware, as is succinctly explained by Gov.uk “a salary sacrifice arrangement is an agreement between an employer and an employee to change the terms of the employment contract in order to reduce the employees entitlement to cash pay”. The sacrifice of cash entitlement is most often made in exchange for some type of non-cash benefit. It is crucial to note that a salary sacrifice arrangement cannot, by law, reduce a worker’s cash earnings below the current relevant official minimum wage rate for that worker.
With regards to Tax and NIC, the cash component goes through PAYE as normal but when it comes to non-cash benefits, they must be reported to HMRC at the end of the tax year using either forms P11D or P9D. Currently, some non-cash benefits are in fact exempt from tax.
The future of salary sacrifice may well be very different from the current state as the government has put forward a proposal for some pretty dramatic changes. They have proposed to alter the tax regulations so that;
- – Where a benefit is provided to an employee through salary sacrifice, both income tax and NI contributions will be payable to the government on the value of that benefit.
- – Crucially, the proposed amendments to the regulations will not apply to several things. These include employer-supported childcare and workplace nurseries, bicycle’s and bicycle safety equipment as well as employer pension contributions and pension advice.
- – The government’s new proposal will not prevent employers from providing benefits through a salary sacrifice scheme, but will remove the tax and national insurance advantages that currently play a large role in incentivising a large proportion of employers to do so.It would be reasonable to assume that the drastic proposed changes are largely due to the fact that in recent years there has been a large rise in the number of salary sacrifice schemes operating in the United Kingdom. And as a result of this the government is losing out on some income tax and national insurance contributions, as most non-cash benefits are exempt from tax.However, the government doesn’t want employers to stop providing useful non-financial benefits to employees which is why there are still some non-financial benefits (mentioned in the second bullet point above) that are still exempt from the changes thus not to disincentive employers so much that they stop providing all non-financial benefits to employers.
Understandably, these changes will affect some employers more than others. The employers that will be most affected will be those that are providing non-cash benefits to many of their employees that are not exempt under the new proposed rules. Thus, those employers will now soon be liable for greater income tax and national insurance contributions, assuming the new proposals go ahead in April next year (when they are scheduled to) and are not changed in the interim.
We hope this article has helped you better understand what precisely salary sacrifice is, what the new proposed government changes to salary sacrifice taxation are, why they are likely to be implemented and which employers are going to be most affected.