Salary Sacrifice Changes: What Do They Mean?

What you and your employees need to know

On November 23rd, 2016, Philip Hammond announced his first budget as Chancellor – and the first since the Brexit vote. With it came the announcement of changes to salary sacrifice rules that will impact employee benefit programmes across the UK.

Fortunately, we were not unprepared for this – the government announced a consultation on salary sacrifice back in August, and a change has been on the cards for longer still. The way salary sacrifice works has grown very organically over the years, which unfortunately means the government are now having to play legislation catch-up, without much thought for workers and their families who will be losing out on very useful savings.

It’s not all bad news, by any stretch – changes don’t come into effect for new schemes until April 2017, and existing schemes will be protected until April 2018 – so there’s still quite a while to make the most of salary sacrifice in its current form. Salary sacrifice arrangements for cars, accommodation and school fees have even longer – they will be unchanged until April 2021.

As this has been a long time coming, we’ve also been able to plan ahead to ensure transitions are smooth, and that we are on hand to help implement new schemes in a way that maximises support for your employees.

The good news

Fortunately, the government have recognised the essential importance of some major salary sacrifice benefits. Pensions will be untouched, and there will be no change to childcare vouchers whatsoever, ensuring families are still able to plan for the future and receive much-needed assistance with childcare far beyond April 2018, and even 2021.

Cycle-to-work schemes and ultra-low emission (ULE) cars (CO2 emissions of up to 75g/km) will also be left alone, to continue to support people in the important effort to get to work as environmentally soundly as possible.

What’s changing? 

So, let’s get down to what these changes actually mean. The headline is that as of April 2017, most salary sacrifice schemes will be subject to the same tax as cash income. This means that employers can still offer these benefit programmes, and that money will still come directly off an employee’s payslip, but neither the employee or their employer will receive a reduction in NI payments. Tax will effectively be paid before the money is taken out.

It’s a great shame that the government have opted for a broad removal rather than a review of existing schemes that could have been fairer and more beneficial to all, but now is the time to look ahead. As we’ve said, it’s not all bad news – the Chancellor has guaranteed that schemes in place before April 2017 will have the tax savings protected for longer, with existing programmes continuing to benefit until April 2018. Non-ULE cars, accommodation and school fees will be protected for longer still – until April 2021. And, of course, pensions, childcare vouchers, ULE cars and cycle-to-work schemes are being left alone for the foreseeable future.

Free ebook: Maximising Employee Rewards in the Current Economic Climate  Find out how benefits and rewards make a big difference when belts are at  their tightest in our free ebook.

What happens next?

With these benefits having such a large impact for working families, offering much-needed savings and support, it is natural for organisations to want to make the most of salary sacrifice in its current form while it is still available.

In the wake of these planned changes, there are two main considerations to be made:

1. With demand being high, it will put a strain on supply. If you intend to run a salary sacrifice programme, plan for it now and give your supplier notice.

2. Keep in mind the dates when tax savings will expire. If you run a 12-month scheme, you and your employees will not be affected, but a longer programme will, for the majority of benefits, see an increase in payments to the employee come April 2018. However, 12 months of saving can very much be viewed as better than nothing for your employees in this difficult financial climate, provided the changes are clearly communicated from the outset.

For now, there is still time to take make use of the current arrangements, while remaining safe in the knowledge that there will still be savings on childcare, cycle-to-work and ULE cars for years to come, and that there will still be support with pensions to help generate savings for both the employee and the employer.

While many salary sacrifice schemes will come to an end in their current form over the next four-and-a-half years, we firmly believe it will make way for a number of innovative salary deduction programmes in the future.

These programmes still provide excellent support for employees’ lifestyle, wellbeing, health and work-life balance, offering benefits of far greater value than the NI savings in the form of a happy, motivated and well-cared-for workforce. We discuss this in greater detail in our post on the pros and cons of salary sacrifice - and you can also contact us with any questions or concerns.

Maximising Employee Rewards