Policy paper

Income Tax: limitation of salary sacrifice

Published 5 December 2016

Who is likely to be affected

Individuals who receive benefits in kind (BiKs) from their employers through salary sacrifice arrangements or who can choose between cash allowances and BiKs.

Employers who provide their employees with BiKs through salary sacrifice or offer BiKs with a cash alternative.

General description of the measure

The measure will limit the Income Tax and employer National Insurance contributions (NICs) advantages where BiKs are offered through salary sacrifice or where the employee can choose between cash allowances and BiKs.

Salary sacrifice is a contractual arrangement between an employee and their employer involving a reduction of an employee’s cash pay in return for a BiK, such as a phone or a car. For some BiKs the value used for calculating tax and NICs liability is less than the amount of the cash pay forgone, allowing the employee and employer to choose to pay less tax and NICs than they would otherwise.

The measure will fix the taxable value of those BiKs provided through salary sacrifice at the higher of the amount of cash forgone or the amount calculated under the existing BiK rules.

There will be no change to the tax and NICs advantages of salary sacrifice arrangements for: pension saving into a registered pension scheme, employer provided pensions advice, employer-supported childcare, cycle to work schemes or Ultra Low Emission Cars (ULEVs). Further, those already in contracts for BiKs involving salary sacrifice will be protected for the length of that contract, subject to final backstop dates.

Policy objective

Salary sacrifice allows some employers and employees to pay less Income Tax and NICs by replacing cash salary with BiKs. This is limited to employees of small number of employers who offer salary sacrifice schemes or offer BiKs with a cash alternative. The tax and NICs savings available have an Exchequer cost which is borne by the majority of taxpayers.

To address this unfairness, the government intends to limit the Income Tax and employer NIC advantages of salary sacrifice arrangements (and employee NIC advantages where these are already chargeable to employee NICs).

Valuing the BIK based on the higher of the salary sacrificed or the current taxable value of the BiK will ensure that tax and NICs is charged on an amount that reduces the current inequalities.

To support wider governmental objectives, the tax and NICs advantages of a number of BiKs have been protected and will not be affected by this measure. After consultation, this includes ULEVs to incentivise take-up and improve air quality.

Background to the measure

At Summer Budget 2015, the government announced its concern about the growth and increasing cost of salary sacrifice and that it would actively monitor this. At Autumn Statement 2015 the government noted that it remained concerned and would gather evidence on the use of salary sacrifice.

At Budget 2016 the government announced that it would consult on limiting the advantages of salary sacrifice arrangements. The consultation ran between 10 August 2016 and 19 October 2016.

The government also consulted on reform of the car benefit charge for ULEVs. The consultation ran between 10 August 2016 and 19 October 2016. The response was published on 5 December 2016.

Detailed proposal

Operative date

The measure will have effect for all contracts for BiKs involving salary sacrifice arrangements entered into on or after 6 April 2017. Those employees already in such contracts at that date will become subject to the new rules in respect of those contracts at the earlier of:

  • an end, change, modification or renewal of the contract
  • 6 April 2018, except for cars, accommodation and school fees when the last date is 6 April 2021

ULEVs will retain their current tax treatment and will not be subject to the new rules.

Current law

Employees are subject to Income Tax and Class 1 NICs on the full amount of cash received as earnings from an employment under Part 2 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) and section 6 of Social Security Contributions and Benefits Act 1992 (SSCBA).

Any BiKs provided are taxed on amounts calculated under the rules in Part 3 of ITEPA 2003, subject to exemptions in Part 4 of ITEPA 2003.

Section 10 of SSCBA imposes Class 1A NICs liability on the employer for BiKs where there is a charge to tax but no Class 1 NICs are due. The amount of Class 1A NICs is calculated using the taxable value of the BiK.

Proposed revisions

Legislation will be introduced in Finance Bill 2017 to amend Chapter 2, Part 3 of ITEPA to introduce a rule to value all BiKs at the higher of the cash forgone or the current taxable value per Part 3 of ITEPA whilst disapplying exemption provisions in Part 4 of ITEPA. The following will not be affected by this rule:

  • employer provided pension saving - sections 308 to 308A
  • employer provided pensions advice - section 308C
  • childcare vouchers - section 270A
  • workplace nurseries - section 318
  • directly contracted childcare - section 318A
  • cycle to work schemes - section 244
  • ULEVs emitting 75g CO2/km or less - section 139

Current contracts will remain under the pre-2017 rules until the contract ends, is modified or changed or is renewed, or April 2018 at the latest. However, the April 2018 deadline is extended to April 2021 for cars, accommodation and school fees.

The emission level for exempt ULEVs may be updated in future, to be consistent with any changes to the treatment of these vehicles within the car benefit charge.

There will be no changes to the Class 1A NICs legislation as valuation rules for NICs purposes follow that of Income Tax.

Summary of impacts

Exchequer impact (£m)

2016 to 2017 2017 to 2018 2018 to 2019 2019 to 2020 2020 to 2021 2021 to 2022
-10 +85 +235 +235 +235 +260

These figures are set out in table 2.1 of Autumn Statement 2016 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2016.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Behavioural responses considered in the costing include employees stopping using salary sacrifice or employers ceasing to operate the salary sacrifice arrangements.

Impact on individuals, households and families

This measure is expected to impact individuals who are provided with BiKs under salary sacrifice or cash alternative arrangements. It is estimated that this will impact 1 million individuals.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

HM Revenue and Customs (HMRC) does not hold data on the protected characteristics of those affected, but the measure will apply equally to all individuals who use salary sacrifice arrangements and is not expected to have equality impacts on groups sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to have an administrative impact on businesses. The minority of employers who operate salary sacrifice schemes will incur one-off costs for IT changes in addition to the normal annual cycle, familiarisation with new rules and changes to internal processes. This is expected to be negligible after taking behavioural changes into account.

Ongoing costs include: the submission of additional P11Ds where employees are provided with exempt benefits only; and some additional reporting requirements for employers already submitting P11Ds.

HMRC expects the additional burdens ongoing cost will be £3.3 million per annum.

Estimated one-off impact on administrative burden (£m)

One-off impact (£m)
Costs negligible
Savings -

Estimated on-going impact on administrative burden (£m)

Ongoing average annual impact (£m)
Costs 3.3
Savings -
Net impact on annual administrative burden 3.3

Operational impact (£m) (HMRC or other)

HMRC costs of implementing the changes are estimated to be in the region of £2 million for both the IT changes and administrative costs.

Other impacts

Wider environment impact: mid-range CO2 emitting cars will no longer be advantageous under salary sacrifice and cash alternative arrangements. Some may move to more polluting cars which have the same taxable value. However, others are expected to move to less polluting cars as they will still be tax advantaged.

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored and assessed through continued observation on the use of salary sacrifice and cash alternative schemes. Any changes to carve outs, including any changes in the definition of a ULEV (75g CO2/km) to remain consistent with government objectives, will be announced in sufficient time for individuals to make choices prior to entering into contracts.

Further advice

If you have any questions about this change, please contact the Employment Income Policy Team on email: employmentincome.policy@hmrc.gsi.gov.uk.