Salary Sacrifice – Wounded not SlainLeave a Comment
Salary sacrifice is when you agree to give up part of your salary in return for non-cash benefits. The first known case of this in practice was a voluntary car loan scheme set up in 1954 by John Waddington Limited for its employees, who in return for the use of a car accepted a weekly wage reduction. We only know about the scheme because Ralph Bell, having been assessed to income tax on the basis that the amount of the wage reduction was part of his emoluments, appealed and the case went all the way to the House of Lords where the Crown finally won in 1969.
In discussing the merits of Ralph Bell’s case, some clear guidelines for what would constitute a successful salary sacrifice scheme emerged and many employers and employees have benefited since. In his Autumn Statement however, Philip Hammond described this tax saving as unfair and said that from April 2017, employers and employees who use these schemes will pay the same taxes as everyone else.
The legislation in The Finance Bill 2017 fixes the taxable value of benefits in kind provided through salary sacrifice at the higher of the amount of cash forgone and the amount calculated under the existing benefit rules. Unfortunately this does not mean in every case that employers and employees who use these schemes will pay the same taxes as everyone else as Mr. Hammond suggested; in some cases, they will pay more!
Consider the example of workplace parking, a benefit that is currently exempt from tax. From April 2017 if you are given a parking space without entering a salary sacrifice arrangement in respect of it, the benefit will continue to be exempt. If however you enter an agreement to sacrifice salary of say £500 in respect of the parking space, you will have a taxable benefit of £500. This would appear to be punitive rather than fair.
However, some benefits have been excluded from the new rules and there are also transitional arrangements for schemes that are already operational. Excluded benefits that can continue to be offered under a salary sacrifice scheme include employer provided pension saving and advice, childcare vouchers, workplace nurseries and directly contracted childcare, cycle to work schemes and ultra-low emission vehicles emitting 75g CO/km or less.
Where you are already within a salary sacrifice scheme, you will continue to be taxed under the old rules until April 2018, or when the agreement with your employer ends or is amended if earlier. For benefits such as cars, accommodation and school fees where the impact of losing the tax benefits will be much higher, employees within existing contracts can continue to benefit until April 2021.
Although the rules will apply from 6 April 2017, the legislation is still in draft. However if you are either an employer with a salary sacrifice scheme in place or an employee receiving benefits under such an arrangement, it is worth checking how long you will be able to benefit from the scheme and considering your options in respect of benefits provision in the future.
If you would like more information on salary sacrifice – or you have any other questions regarding taxation, please contact Julia Clarke, Tax Director at Wright Vigar, by emailing her at firstname.lastname@example.org or call her on 01522 531341. Julia and the Tax Team at Wright Vigar would be delighted to be able to help you.