An employers’ guide to Salary Sacrifice Schemes

What is a salary sacrifice scheme?

In basic terms, a salary sacrifice scheme does just as it says on the tin. Employees exchange part of their salaries with employers for extra benefits. Whilst this all sounds straight forward, changes are afoot from 6 April 2017, which all employers and employees need to be aware of.

How it currently works

At present, many employers give staff the option to swap a part of their wage in return for a non-cash benefit. Such schemes have not only benefited employees because they were required to pay less tax and National Insurance (due to having a lower salary), but employers too – who save on National Insurance contributions linked to salary.

The most widely used benefits by staff have traditionally been pension contributions, childcare costs, cycle to work schemes and health insurance. However, in recent years there has been an increase in schemes which include company cars, gym memberships, mobile phones and even white goods.

What’s changing?

As announced in the Autumn Statement, Philip Hammond has tightened the rules allowing workers to make these exchanges, deeming the current system as unfair. From April 2017, the tax benefits of such schemes will be scrapped and it is proposed that any employee entering a scheme after 5 April 2017 will be liable for a tax charge. This will be whichever amount is higher from:

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

It’s also important to note that this will apply even if the benefit is usually exempt from tax and class 1A National Insurance.

Under the changes, the following benefits will no longer be eligible:

  • Mobile phones
  • Gym memberships
  • School fees
  • Accommodation
  • White goods

The following benefits will remain unchanged:

  • Pensions
  • Childcare
  • Cycle to work schemes
  • Ultra-low emission cars

Those classed by the government as ‘long term arrangements’, which includes cars, accommodation or school fees, will remain protected until April 2021.

What does this mean for employees?

In basic terms, the schemes which were previously eligible for salary sacrifice will now incur tax and National Insurance costs.

What does this mean for employers?

If your business currently offers salary sacrifice arrangements then you will need to plan, whether the benefits you offer have been removed or not.

Next Steps

  1. Understand how your staff will be affected: how have they been benefiting from salary sacrifice so far? Which benefits will be removed from April? Get the facts clear about how this will affect your team, understand how this will impact them so you can address their frustrations.
  2. Review all contractual and policy documentation: applicable to any salary sacrifice schemes, and revise it to ensure it is compliant with the new tax and NI position and doesn’t inadvertently mislead employees.
  3. Communicate with employees now: even if your schemes will not change, you will still need to inform employees and explain the wider changes so they fully understand, and ease any concerns they may have.
  4. Be visible with the financials: make sure you have the key financial information to hand when communicating with staff so that you can highlight if the money will be re-invested elsewhere, and avoid a potential loss of morale.
  5. Plan for the changes now: look at the options available to you and assess whether you should remove the benefit altogether or offer it without salary sacrifice? Is there anything you can offer your staff in its place? If you can prepare now you can ensure your staff don’t miss out and lose a valuable perk of working for your business.

For more information, or advice on salary sacrifice schemes contact us .