Salary Sacrifice Arrangements

The Government have become concerned that salary sacrifice arrangements are being used in an abusive manner and so new rules are introduced to limit the income tax and employer NIC advantages where benefits-in-kind are provided through salary sacrifice arrangements (described in the legislation as optional remuneration arrangements).

The rules impose a notional cost on taxable benefits based on the value of the amount of salary given up if this is greater than the charge that would otherwise be due under the legislation. For most benefits which are subject to either a full or a limited tax exemption, the exemption is disapplied if the benefit is provided in conjunction with a salary sacrifice arrangement.

What is an optional remuneration arrangement?

For the purposes of the benefits code a benefit provided for an employee is provided under optional remuneration arrangements if it is provided under arrangements:

• under which, in return for the benefit, the employee gives up the right (or a future right) to receive an amount of earnings within Chapter 1 Part 3 ITEPA 2003; or
• under which the employee agrees to be provided with the benefit rather than an amount of earnings within Chapter 1 Part 3 ITEPA 2003.

Which benefits are affected?

The principle is generally the same. Where a benefit is provided under an optional remuneration arrangement, the greater of the cash equivalent or the amount foregone is treated as earnings when the benefit is provide. Benefits affected are:

• Cash vouchers - amended s81 ITEPA 2003.
• Non-cash vouchers - new s87A ITEPA 2003.
• Credit tokens - new s94A ITEPA 2003.
• Living accommodation - amended ss97-102 and ss105-106 ITEPA 2003. A new s103A ITEPA 2003 creates a new 'modified cash equivalent' and it is the greater of this figure and the amount forgone which will be taxed.
• Cars - where a car is made available and an alternative to the car is offered, then provided that the emissions do not exceed 75gm/km, the new rules do not apply (amended s119 ITEPA 2003). However, in other circumstances the new rules will apply the greater of a new 'modified cash equivalent' and the amount forgone will be taxed - new ss120A, 121A-B and 132A ITEPA 2003. A new 147A deals with classic cars and numerous other consequential amendments are made.
• Car fuel - new s149A ITEPA 2003.
• Vans - new s154A ITEPA 2003, again taxing the greater of a new 'modified cash equivalent' and the amount forgone.
• Van fuel - new s160A ITEPA 2003.
• Cheap loans - amended s175 ITEPA 2003, again taxing the greater of a new 'modified cash equivalent' in new s175A ITEPA 2003 and the amount forgone.
• The general rules on the cash equivalent of loans - new s203A ITEPA 2003.
• The general tax exempt amounts - new s228A ITEPA 2003. This provides that where a benefit is provided by an optional remuneration arrangement, the exemption will no longer apply unless it is specifically referred to below:
• s244 ITEPA 2003 (cycles and cyclist's safety equipment);
• s270A ITEPA 2003 (limited exemption for qualifying childcare vouchers);
• s308 ITEPA 2003 (exemption of contribution to registered pension scheme);
• s311 ITEPA 2003 (retraining courses);
• s318 ITEPA 2003 (childcare: exemption for employer-provided care); and
• s318A ITEPA 2003 (childcare: limited exemption for other care).

Some existing rules e.g. the exemption for paid/reimbursed expenses already restrict relief where salary sacrifice arrangements are in place and these restrictions continue.

Start date

Generally, the changes apply for 2017/18 and subsequent tax years but not in relation to pre-6 April 2017 arrangements.

In relation to pre-6 April 2017 arrangements, the changes relating to exemptions apply to 2018/19 and subsequent tax years.

In relation to pre-6 April 2017 arrangements for living accommodation, cars, vans and fuel, the changes apply to 2021/22 and subsequent tax years.

In relation to pre-6 April 2017 arrangements for vouchers, credit tokens and cheap loans, the changes apply to 2018/19 and subsequent tax years. However, in relation to relevant school fee arrangements which came into effect before 6 April 2017, the changes apply to 2021/22 and subsequent tax years.

If the terms of any pre-6 April 2017 arrangements are varied or renewed on or after 6 April 2017, the new rules apply from the day on which the variation is made.

Clients may wish to review their remuneration packages sooner rather than later to ensure that they and their staff are unaffected by these changes.