The Government is to axe 'salary sacrifice' tax perks on a range of employee benefits such as health screening checks, company cars and mobile contracts from 5 April. But if you're already on one of these schemes or join one by 4 April, you may be able to keep the tax benefits for up to four years.
Salary sacrifice schemes are provided by many employers to save staff money and help spread costs. You give up part of your salary, and your employer gives you a non-cash benefit - crucially, this comes out of your pre-tax pay, so you're spared paying tax and national insurance (NI) on it.
But in the Autumn Statement, the Chancellor Philip Hammond announced sweeping changes to how the schemes will work. We've explained these in full below, but in brief:
- Most schemes which are currently tax-free will soon be taxed. So employees will have to pay the same tax on what they put into these schemes as they would on any other income, and employers will have to pay the same NI. (Employees still won't have to pay NI on this though, so may get to keep some of the benefit).
- Pension, childcare, cycle-to-work and ultra low-emission car schemes are protected. They WON'T have perks axed and will CONTINUE to offer employees big tax and NI savings.
- If you're already on a soon-to-be-axed scheme or sign up by 4 April, you keep the perks for a while. Most schemes stay tax-free until April 2018 - those relating to cars, accomodation or school fees until April 2021.
Autumn Statement 2016: Other key stories
Which salary sacrifice schemes are having their tax perks axed?
From 5 April 2017 many types of scheme will no longer offer employee tax perks or employer NI perks for arrangements being set up for the first time. Here are some examples of schemes losing perks because of today's changes:
- Company cars (unless they're ultra-low emission vehicles)
- Work-related training
- Car parking near your workplace
- Health screening checks
- Mobile phones, computers and other tech
- Gym membership
- School fees
Which salary sacrifice schemes will remain?
The following schemes are exempted from the changes announced today and so will continue to offer tax perks from April 2017:
- Pension contributions
- Cycle-to-work schemes
- Ultra-low emission cars
How does 'salary sacrifice' work?
Once you accept a salary sacrifice, your pay is reduced at source (out of your pre-tax salary), so you end up paying less tax and/or NI. Meanwhile, your employer doesn't have to pay their employers' NI contributions on the part you sacrifice, so it can pass on some or all of the subsequent savings to you.
The idea behind salary sacrifice is that it's a 'win-win' situation for the employee and the employer.
How much are salary sacrifice schemes typically worth?
How much you can save all depends on what tax you pay and how much of your salary you're setting aside, but here's what someone sacrificing £100 could save:
- if you're a basic-rate taxpayer, you'll avoid paying £20 in income tax (charged at 20%) and save another £12 in NI contributions (charged at 12%). So in effect, you can get £100 in benefits for a salary deduction of just £68.
- if you're a higher-rate taxpayer, you'll avoid paying £40 in income tax (charged at 40%) and £2 in NI contributions (charged at 2%). So you can get £100 in benefits for a salary deduction of just £58.
- if you're an additional-rate taxpayer, you'll avoid paying £45 in income tax (charged at 45%) and £2 in NI contributions (charged at 2%). So a salary deduction of just £53 will get you £100 in benefits.
What if I'm already on a scheme that's now set to be axed - or join one?
All salary sacrifice arrangements in place before 5 April 2017 will continue to enjoy their tax-exempt status until at least April 2018 - and existing arrangements for cars, accommodation and school fees will be tax-free until April 2021.
So that means if you're not already on one of these schemes, if you act quick, you may be able to opt in now and enjoy the tax benefits for either a further year or further four years.
Remember also that schemes which lose their tax perks will keep their employee NI perks, so you'll still save 12% (basic-rate taxpayers) or 2% (additional and higher-rate taxpayers) by paying through salary sacrifice.
However some employers may stop offering schemes that are losing their tax exemptions, if they no longer consider it worth their while. That's because employers currently get to reduce their own NI contributions by running the schemes. Those employer NI savings are now being scrapped, reducing the incentive for employers to offer such schemes.
Remember if you continue to be part of a scheme after the tax perk ends, you'll start paying more tax - though how much more will depend on your tax bracket and the size of the salary sacrifice you were making.
And aside from any tax and NI perks, these schemes can help you spread the cost of big expenses without using a credit card.
Why is the Government axing tax perks on so many schemes?
The Chancellor deemed many salary sacrifice schemes "unfair" in his speech this afternoon, and some curbs on the perks had been widely anticipated. The Government has had salary sacrifice in its sights for some time, announcing in April's Budget that it would seek to limit them.
In August HMRC launched a consultation exploring the potential imact on employees and employers if the tax rules were changed.
That consultation results have yet to be published, but the Government has already pressed ahead with its plans.