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Salary sacrifice schemes have often been a popular perk for employees and employers alike. However, in 2017 the scheme received a shake up and was replaced with Optional Remuneration Arrangements instead. The aim of this change was to limit the amount of tax which could be saved by the employer/employee.
Optional remuneration arrangements were brought in to replace salary sacrifice, which was where the employee chose to give up some of their salary in exchange for a benefit in kind, for example a phone or a company car.
The employee would pay income tax on the value of the benefit in kind and the employer would pay Class 1A National Insurance on this value.
The issue with these types of arrangements were that the taxable benefit amount could be less than the value of the salary that an individual had given up.
The effect of this is that there would be less Income Tax and National Insurance payable by both the employer and the employee than there would be if the arrangement had not been entered into.
The government first noted their concern at the increased use of salary sacrifice arrangements at the Budget 2015, monitoring this over the following year and announcing a consultation on limiting the advantages of these at Budget 2016.
Details of the consultation can be found here.
From 6 April 2017 changes to the legislation (ITEPA 2003) meant that the value of any P11d benefit for any salary sacrifice arrangement will be the higher of:
a) The amount of salary sacrificed; or
b) The usual value of the benefit in kind
This in effect removes the tax saving by ensuring that the amount subject to tax at least equal to the amount of salary forgone.
For any employees already using salary sacrifice arrangements, these are protected for the length of that contract so there will no changes until a new arrangement is entered into. There are some exceptions for cars, accommodation and school fees.
There are also exemptions in Part 4 ITEPA for the following types of arrangements:
Note that there is still no employee’s NI payable on a benefit in kind, so there is still some benefit to employees in having these arrangements. The employer will pay Class 1A NI on the benefit value so will pay the same amount as they would if the employee had opted to keep their salary.
Below are a number of potential pitfalls of the scheme: