Salary sacrifice arrangements used to be a cost-efficient way of allowing employees to enjoy tax-exempt benefits without passing the cost of providing those benefits on to the employer. However, changes in the rules which came into effect from 6 April 2017 mean that salary sacrifice and flexible benefit schemes are no longer as attractive as they once were.
Under the new rules, unless the benefit is one of a limited range of protected benefits, new valuation rules apply the effect of which is that the benefit of any associated exemption is lost where the benefit is provided under a flexible benefit or salary sacrifice arrangement or where a cash alternative is offered instead.
Where the new valuation rules apply, the employee is taxed by reference to the salary forgone or the cash alternative offered where this is higher than the cash equivalent calculated under normal rules.
The new valuation rules do not apply to:
• Pension savings
• Employer-provided pension advice;
• Childcare and Childcare vouchers;
• Cycles and cyclists’ safety equipment under cycle to work schemes; and
• Ultra-low emission cars.
Any associated exemptions remain available where benefits on this list are made available through a salary sacrifice arrangement or where a cash alternative is offered instead.
Transitional rules apply where an arrangement was in place on 5 April 2017 which delay the start date of the new rules.
If you offer salary sacrifice arrangements or cash alternatives to your employees, please contact us to discuss whether these remain tax efficient.