Change on the horizon for salary sacrifice schemes

Salary sacrifice schemes have long been used by employers to provide a wide range of benefits to employees. However, changes to such schemes, announced in November’s Autumn Statement, mean that employers who have these arrangements in place must prepare themselves to make sure they adhere to the new legislation coming into effect from 6 April 2017.

The change in legislation is due to the Government’s previously expressed concerns regarding the growing use of salary sacrifice arrangements, especially as the employee is effectively paying for the benefit themselves through the reduction in their gross pay, with the Government collecting less tax and National Insurance as a consequence of the salary sacrifice.

The Government published its consultation on 10 August 2016 which included the framework to address the perceived inequality created using salary sacrifice.

Draft legislation

It is proposed that where an employee enters into any salary sacrifice after 5 April 2017 a tax charge will be based upon the greater of:

  • The salary sacrifice; or
  • The cost to the employer in providing the benefit

This approach will apply even where the benefit is normally exempt from tax and Class 1A National Insurance.

Favourable benefits

It has also been confirmed that the provision of the following favourable benefits will be outside the scope of the “optional remuneration arrangements”:

  • Pension contributions;
  • Pension advice;
  • Childcare arrangements;
  • Cycle to work schemes; and
  • Ultra-low emission cars

It will be possible for the above benefits to continue to be provided as part of a salary sacrifice arrangement and not be subject to the new legislation. The Government has confirmed employers will be able to make available “intangible benefits”, such as additional leave, by entering into flexible working arrangements via salary sacrifice without invoking the new legislation.

Employers can proceed with a degree of certainty and the ability to adopt salary sacrifice for employee pension contributions for those employees who do not participate in a defined benefit pension scheme. This will prove exceedingly helpful bearing in mind the requirement under the Workplace Pension Regulations where there will be a requirement for both the employer and employee to make combined minimum pension contributions of 8% by 6 April 2019.

Transitional rules

The draft legislation includes transitional rules which will help employers and employees adapt to the proposed changes.

Under the transitional rules, where an employee has entered into an arrangement before 6 April 2017, they can continue to benefit from the tax and National Insurance advantages under the salary sacrifice until 2018. Where the arrangement relates to one of the following benefits, the transitional period will be extended to 5 April 2021:

  • Cars;
  • Living accommodation; and
  • School fees

However, the transitional period will be foreshortened where one of the following events occurs before the end of the transitional period:

  • The arrangement comes to an end; or
  • There is a change to the arrangement; or
  • Modification to the arrangement; or
  • Renewal of the arrangement

The first of the “tests” is fairly clear cut and should represent a natural end of the benefit being provided. However, the remaining “tests” will present some challenges for the transitional rules to be provided up to either April 2018 or 2021.

The following example summarises the position as it relates to the provision of gym membership in conjunction with a salary sacrifice.


The current salary sacrifice arrangement is due to come to an end in August 2017. The member of staff enters into a new salary sacrifice arrangement in respect of the gym membership from 1 September 2017.

Whilst both agreements have been entered into before April 2018, there has been a renewal of the arrangement and under the transitional provisions the tax advantages derived under a salary sacrifice will cease to be effective from August 2017. Under the optional remuneration arrangement legislation the employee will be liable to tax and National Insurance from September 2017 on the greater of:

  1. The salary sacrificed; or
  2. The cost to the employer in providing the benefit

It is unlikely the employee will be better off by entering into a new salary sacrifice arrangement beyond August 2017.

Other points to consider

Employers will also need to consider the following as a consequence to the new legislation:

  • Once the salary sacrifice arrangement comes to an end the employee’s earnings will revert to their pre-sacrificed amount which will be liable to income tax and National Insurance;
  • Depending upon the nature of the benefit provided, for some employees this could mean they will be liable to income tax at a higher rate;
  • The employer will potentially have an increased National Insurance liability;
  • The employer will also have an increase in earnings for the purpose of calculating the Apprenticeship Levy;
  • Potentially there will be an increase in pension contributions although this will be dependent upon whether the employer arranged for pension contributions to be calculated by reference to the pre or post sacrificed salary;
  • For the employee the following points will need to be considered:
    • Annual Allowance;
    • Lifetime Allowance; and
    • Increase in pension contributions
  • The impact on earnings related State benefits and other salary linked entitlements

Next steps

The following are key action points you should be considering:

  • Employers who are affected by the changes should consider responding to the consultation in respect of the draft legislation. The consultation period is due to end on 30 January 2017;
  • Advise employees that tax efficient salary sacrifice arrangements are due to come to an end and whilst there are transitional rules in place until 2018 (extended to 2021 for selected benefit arrangements) the likelihood is that the current year’s arrangement will be last which can be provided via an effective salary sacrifice arrangement;
  • Consider varying the existing arrangements before 5 April 2017 in order to fully maximise the transitional period;
  • Arrange for any new participants to enter into arrangements before 5 April 2017;
  • Advise employees that salary sacrifice can continue, or be introduced in respect of favoured and intangible benefits;
  • For employers with a payroll cost of £3m or more it will also be necessary to take into account the impact of the Apprenticeship Levy which is due to commence on 6 April 2017; and
  • Where employers are not already doing so, consider offering salary sacrifice in respect of pension contributions, as well as the other favoured benefits


The changes within the draft legislation are far reaching and go beyond preventing the use of salary sacrifice arrangements in the future. Employers should now review their existing arrangements and prepare for the impact of the new legislation.

Nick Bustin, Director of Employment Tax, haysmacintyre