The 2016 Autumn Statement confirmed fears that it is the end of the road for many salary sacrifice schemes.
The writing was already on the wall in the Spring Budget, with hints that the government could limit the range of tax savings benefits available through salary sacrifice schemes. And now the new Chancellor, Philip Hammond has confirmed that he will be restricting these tax-free benefits.
Benefits of salary sacrifice
Salary sacrifice schemes are beneficial for both parties. The schemes allow an employee to lose part of their salary in return for a non-cash perk from their employer.
In practice, this often takes the form of a mobile phone contract, gym membership, or contribution towards school fees. If an employee’s salary is reduced and offset against the value of the non-cash benefit, the employee pays less tax and NI.
Example: If a gross salary was reduced by £700, a higher-rate taxpayer would save almost £300 in income tax and NI. The employer also benefits too, saving £97 in NI.
But where the schemes were a ‘win-win’ for workers and their employers, they were a ‘lose-lose’ for the Treasury. So mobile phones, gym membership and school fees will be cut. Other benefits scrapped include car parking, health screening and gadget insurance.
On the plus side, certain benefits have escaped the cull. The planned changes will not affect pensions and things like cycle-to-work schemes and childcare vouchers.
The planned changes will cost employers and employees an estimated £85m in . By 2020, those costs could rise to as much as £260m. From the government’s point of view, the tax coffers could be boosted by an extra £1bn over the next six years.
Protected until 2018
To reduce the impact on employees and to make the changes more manageable for employers, salary sacrifice schemes already in place are protected until April 2018.
Longer term arrangements such as cars and accommodation, will be allowed to stay in place until April 2021.