RegulationAug 19 2016

Tax spotlight: Salary sacrifice

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Tax spotlight: Salary sacrifice

HM Revenue & Customs has launched a consultation on limiting the range of benefits that have income tax or national insurance (NI) contributions advantages when provided as part of salary sacrifice or flexible benefit arrangements.

The closing date for comments is 19 October 2016. The consultation will affect salary sacrifice and flexible benefit schemes where cash remuneration can be exchanged for benefits in kind.

Benefits that will not be affected are:

• Employer pension contributions,

• Employer-provided pension advice,

• Employer-supported childcare and provision of workplace nurseries,

• Bicycles and cyclist’s safety equipment provided under the Cycle to Work scheme.

Payroll giving to registered charities will also not be affected, although the government is considering whether employee and employer NI contributions should be applied if offered through salary sacrifice. Sacrifice for intangible benefits, such as annual leave, will not be affected.

The intention is where a benefit in kind is provided through salary sacrifice, it will be chargeable to income tax and class 1A employer NI contributions (even if normally exempt) to the greater of:

• The amount sacrificed,

• A specified cash equivalent (if any).

Salary sacrifice can still be offered for benefits affected by the proposed change, but there will be no tax or NI contribution advantages. Affected benefits offered outside salary sacrifice, for example on top of salary, will retain their NI and tax treatment.

Any decision on this will be announced in the Autumn Statement, and any policy changes will be part of the Finance Bill 2017 and take effect from 6 April 2017.

Pension funding

Salary sacrifice will remain the most tax-efficient way for an employee to fund an approved pension scheme in most cases, and the employee has no personal tax or benefit-in-kind implications. The employer should benefit from full relief against corporation tax.


The principle reason for salary exchange is the saving made on NI contributions on exchanged salary or bonus. This is the alternative of employee contributions paid from an employee’s net pay, which will have already suffered employer and employee NI contributions. The contributions are:

• 12 per cent on band earnings between the primary threshold (£155 a week or £8,060 per annum) and the upper earnings limit (£827 a week or £43,004 per annum)

• 2 per cent on earnings over the upper earnings limit (£827 per week or £43,004 per annum)

Employers pay class 1 NI contributions of 13.8 per cent on earnings above the secondary threshold of £156 per week.

Salary sacrifice is made more attractive if the employer adds their NI savings to the pension contribution.