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The opportunities to use a salary sacrifice arrangements to save tax and National Insurance were seriously curtailed with the introduction of the alternative valuation rules that apply from 6 April 2017 to value benefits provided under an optional remuneration arrangement (OpRA).
Where the rules apply, the benefit of any associated tax exemption is lost if a benefit is provided through a salary sacrifice or other OpRA. Under a salary sacrifice arrangement an employee gives up an amount of salary in return for a benefit in kind. Where the benefit remains exempt from tax when provided under a salary sacrifice arrangement, the employee saves tax and the employer and employee save National Insurance.
Alternative valuation rules
The alternative valuation rules do not apply to the following, and thus the associated tax exemption remains available where provision is made via a salary sacrifice arrangement:
- employer-provided pension savings;
- employer-provided pension advice;
- childcare vouchers;
- employer-supported childcare;
- workplace nurseries;
- employer-provided cycles and cyclists’ safety equipment (including ‘cycle to work’ schemes).
Providing any benefit from the above list under a salary sacrifice arrangement will enable the employee to save the tax that would have been payable on the cash salary, and for the employee and the employer to save the Class 1 National Insurance that would have been paid had the employee continued to receive the ‘sacrificed’ salary.
Low emission cars
In addition to the benefits listed above, the alternative valuation rules do not apply to low emission cars with CO2 emissions of 75g/km or less. Where such cars are provided under a salary sacrifice arrangement of if a cash alternative is offered, the provision of the low-emission car is taxed by reference to the company car tax rules, rather than by reference to the alternative valuation rules.
A salary sacrifice scheme allows the employer to offer employees the opportunity to benefit from the tax exemptions available for the benefits listed above, without passing the cost of providing those benefits to the employer.
National Insurance savings
A salary sacrifice arrangement can also generate National Insurance savings for the employee where the benefit provided is either not exempt from tax or the exemption is lost as a result of the alternative valuation rules coming into play. The employee’s National Insurance saving results from replacing cash salary (which is liable to employee and employer Class 1 contributions) with a non-cash benefit which is liable to employer-only Class 1A contributions. However, when taking into account the administrative costs of administering the salary sacrifice arrangement, this may only be worthwhile if the National Insurance savings are significant.
For a salary sacrifice arrangement to be regarded as effective by HMRC, the employee must not be able to revert to the higher salary at will.
Helen’s employer operates a salary sacrifice scheme to enable employee to swap cash salary for non-cash benefits. Helen takes advantage of the scheme by giving up £2,860 of cash salary for childcare vouchers. Helen is a basic rate taxpayer and as such is able to enjoy the benefit of childcare vouchers of up to £55 per week free of tax and National Insurance.
By swapping cash salary, which is subject to tax and National Insurance, for a tax and National Insurance free benefit, Helen saves tax of £572 (£2,860 @ 20%) and National Insurance of £343.20 (£2,860 @ 12%). She is therefore £915.20 a year better off. If Helen had been a higher rate taxpayer, the tax savings would be £1,144 a year (£2,860 @ 40%). However, the National Insurance saving would only be £57.20 (£2,860 @ 2%). Helen’s employer also benefits, saving employer Class 1 National Insurance of £394.68 on the foregone salary (£2,860 @ 13.8%).
By using a salary sacrifice arrangement to swap cash salary for an exempt benefit everyone wins.
The opportunity to benefit from childcare vouchers (and employer-supported childcare) is only available to employees who joined their employer’s scheme before 4 October 2018. Employees should consider whether the employer’s scheme is better for them than the Government’s top up scheme. Employees in an employer childcare voucher scheme on 4 October 2018 can continue to benefit from the tax exemption for childcare vouchers while their employer continues to operate the scheme.
The option to take advantage of a salary sacrifice arrangement for childcare vouchers and employer-supported childcare is not open to new employees; however, salary sacrifice arrangements can continue to be beneficial for other benefits on the above list and can be offered to both new and existing employees.