Salary sacrifice arrangements

13 December 2016

Heather Wheelhouse

Independent schools nationwide have waited with bated breath to hear the outcome in the Autumn Statement of the government’s consultation on the use of salary sacrifice schemes, otherwise known as ‘salary exchange’. Many schools are making use of these arrangements to bring significant savings in tax and national insurance (NICs) to their employees whilst benefiting themselves in savings of employer NICs. Such schemes are typically used for employees to sacrifice salary in favour of school fees, pension contributions, childcare vouchers and bikes to work.

The outcome of the consultation

The Chancellor confirmed in the Autumn Statement that the tax and NICs advantages of many salary sacrifice arrangements will be lost from April 2017. However, there are certain benefits provided under salary sacrifice which will not be impacted by these changes, whilst grandfathering rules will, to a limited extent, offer some protection to other benefits already provided under these arrangements.

The finer detail on which this article is based was made available by way of the draft legislation released on 5 December, but as this is currently in draft form it is potentially subject to change before receiving Royal Assent.

From April 2017, benefits provided under new salary sacrifice arrangements falling outside the exemption will be taxed at the higher of:

  • the benefit provided (for school fees this is the marginal cost of the school place); and
  • the amount of salary foregone.

Discounts offered to employees without impacting their salary level will not be affected by this change.

Benefits provided under salary sacrifice remaining unaffected by the change

As pledged in the consultation document, it was confirmed that employees will be able to continue to enjoy the associated tax and NICs advantages presently available through salary sacrifice in favour of:

  • pension contributions (and advice);
  • childcare provision; and
  • cycle to work equipment.

As a result of the various representations in the consultation process, the government has added to this list a protection for the provision of ultra-low emission cars (currently defined as CO2 emissions under 75g/km) under salary sacrifice.

This is welcome news and in continuing to offer these arrangements, schools will support employee pension savings, childcare for working parents, health and fitness through cycling and a greener environment, all being important issues for the government.

Download our full report to uncover the benefits impacted by these changes and examples.