If you’re not familiar with the term, then ‘salary sacrifice’ is a bit of a puzzler. Just what is your boss expecting you to sacrifice? A chunk of your wages? A goat in the car park at lunchtime?
Put simply, salary sacrifice arrangements enable employees to give up salary in return for benefits-in-kind that are often subject to more favourable tax treatment than their wage packet.
They’re a nice little earner for staff and employers as they essentially permit a bypassing of National Insurance (NI) payments. So, employers allow their workers to take a so-called ‘pay cut’ and that money is funnelled into a pension or another benefit such as childcare or a mobile phone. The end result: both parties pay less NI, as well as paying tax on a smaller income. The savings can be considerable.
Needless to say, Ministers aren’t entirely thrilled by this arrangement. It costs the Government about £15 billion a year – around £9.5 billion in employer NI contribution reliefs and £5.5 billion in employee NI contribution reliefs.
There have been rumblings about a curbing of these benefits for some time. The Government finally took action in last week’s Autumn Statement, much to the chagrin of businesses and their staff. The Chancellor said that, starting from April 2017, the tax benefits and employer NI savings of salary sacrifice schemes will be removed.
‘Salary sacrifice has been a virtuous circle for employers,’ said Jon Greer from Old Mutual Wealth. ‘They offer their employees discounted benefits like private health insurance and attract good employees. The benefit to them is they don’t have to pay as much national insurance. The impact of the proposed change to salary sacrifice will be a minefield for these companies. Either it will affect their bottom line if they choose to keep the schemes as they are, or they will have to ditch the benefit and risk employee upset.’
Thankfully, some schemes will be protected and retain their tax savings, including childcare vouchers, pensions, ultra-low emission cars and cycle-to-work. The other good news is that workers won’t have to pay NI on the perks and many plans won’t be phased out until either April 2018 or April 2021.
Trevor Clark, operations director at Rutherford Wilkinson, a firm of chartered financial planners, said: ‘While the Chancellor has announced restrictions to the usage of salary sacrifice, the core schemes of pension contributions, childcare and cycle to work have survived, which is positive, not negative, news. These are key benefits that can truly make a difference to someone’s life, and at the same time save on both the employees’ and employers’ National Insurance bill.
‘Surely it was never the intention of any government to allow tax relief on excessive benefits in kind provided by employers and this just mops that up without withdrawing its use for the more important schemes, which had been threatened at one stage.’
Helen Nugent is Online Money Editor of The Spectator