Salary Sacrifice

23 January 2017

HM Revenue & Customs (HMRC) issued a consultation on salary sacrifice for the provision of benefits in kind (BiK), which closed on 19th October 2016. The outcome of the consultation could result in changes to salary sacrifice for some employee benefits which may increase costs for employees and employers.

For interest, our responses to the various questions in the consultation are set out below. Before answering the questions we viewed it as important to apply some context to JLT’s view of salary sacrifice.

We categorise salary sacrifice benefits into three categories:

Category 1: Genuine salary sacrifice benefits which, were not within the scope of this consultation, namely Pension, Childcare Vouchers, Cycle to Work and Annual Leave.

Other benefits we would also class in this category which were not explicitly referenced in the consultation are Health Screening, purchase of additional Life Assurance and Income Protection.

Clarity from HMRC around intentions for these benefits would be welcomed as we believe there is no compelling reason for change.

Category 2: BiK that are deducted using salary sacrifice but then considered for employee income tax and employer National Insurance Contributions (NICs) through P11D or through payroll.

We consider Dental Insurance, Critical Illness Insurance and Travel Insurance as examples of this type of benefit. With this category, the employee only saves NICs, there is no employee income tax or employer NICs savings.

Category 3: BiK that are structured using salary sacrifice but not declared at their full value through P11D or through payroll. This includes benefits such as Mobile Phones, a small number of Technology Schemes and Car salary sacrifice.

Consultation questions

Question 1: Alongside annual leave, are there any other salary sacrifice arrangements that the government should be made aware of that do not strictly involve receipt of a benefit?


Question 2: What are the likely impacts on employers and employees of limiting the scope of BiK that can obtain tax advantages when offered through salary sacrifice arrangements?

In relation to Category 3 benefits as described earlier, in our experience, take up of Mobile Phones and technology products remains low. In relation to Car salary sacrifice, this benefit is increasing in popularity and offers considerable savings on a significant cost in an employee’s everyday life. Where this benefit is aimed at low emission cars (below 120g CO2/km), we consider that it offers benefits to the Treasury by boosting our economy with new car production and reinforces policy objectives of reducing our carbon footprint as a country.

Question 3: Are these impacts different, or are there different considerations, for large/small businesses or particular business sectors?

Many sectors where the current income tax and NICs savings will be most appreciated are typically ruled out of using salary sacrifice. In particular this includes retail, hospitality and manufacturing where many employees will earn, at or just above, the National Living Wage (NLW) and therefore have no headroom to reduce their gross salary without breaching NLW.

Other than that, removing the access to full income tax and NICs savings to Category 3 benefits will be felt by end users but as take up for these benefits is low this will not be a widespread impact.

Question 4: Are the impacts different for particular BiKs?

We expect the impact of any change to Car salary sacrifice to be considerably higher than for other benefits, simply due to the unit values involved being higher. Whilst removing income tax and NICs savings for Technology and Mobile Phone products would be felt, there are still many advantages to these benefits over and above the headline savings.

Changes to BiK rules for Category 1 or Category 2 benefits would have widespread impact on employees and employers.

Question 5: Do you think that the government needs to take any steps to mitigate any negative consequences of this change for employees and employers, such as those who may be locked into salary sacrifice arrangements? If responding, it would be helpful to understand specific examples and factors the government should take into consideration.

If any changes are introduced then a transitional period is essential. The majority of employer benefit election windows fall in January or April, therefore we are about to hit a peak period of the year where new salary sacrifice arrangements are being entered into. We would expect any existing arrangements to be honoured with new legislation taken into account for new arrangements after a given date, which we propose is no sooner than April 2018.

Question 6: Do you consider that the approach proposed for legislation would work as intended?

We would like to see draft legislation before making comment on this aspect.

Question 7: Are there any consequences the government has not considered in proposing to legislate in this way?

Answer as for question 6.

Question 8: Would this timeline present employers with difficulty, for example with updating payroll software?

In our experience, payroll providers can commonly quote lead times up to 20 weeks for changes, this may be even longer if widespread changes are required. This must be considered. Many will also charge for any changes to configuration, with day rates often in the region of £800. As a result, many companies would face bills of several thousands of pounds on top of any increase in National Insurance. Due to capacity and budgeting we therefore feel April 2018 is a more realistic earliest implementation date rather than the proposed one of April 2017.

Question 9: Are there any other changes that employers would need to make?

Communication to employees is likely to be a significant challenge, particularly when they will have already undertaken a considerable exercise in educating their employees when the benefit was introduced. This is likely to take up considerable time and money in addition to the implications listed in our response to Question 8.

Question 10: Are there any other compliance considerations which HMRC should be aware of?

We cannot currently think of any that have not already been identified in the consultation.

JLT also participated in the response made by the Reward and Employee Benefits Association (REBA), which includes research on salary sacrifice amongst its members. A copy of their response can be downloaded here.

For more information contact your usual JLT Consultant or Andrew Drake, Head of Reward and Benefits, on +44 (0) 7827 662232 or at