Salary Sacrifice Arrangements - tax and NIC treatment | KPMG | UK
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Salary Sacrifice Arrangement - the tax and NIC treatment of BiKs

Salary Sacrifice Arrangements - tax and NIC treatment

The income tax and NIC treatment of Benefits-in-Kind provided as part of a salary sacrifice arrangement is to be modified from 6 April 2017.


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The income tax and NIC treatment of BiKs provided as part of a salary sacrifice arrangement is to be modified from 6 April 2017. There will be limited exceptions and existing arrangements will be "grandfathered" until 5 April 2018 (or 5 April 2021 in certain cases).

Summary of proposal

The publication of the draft Finance Bill 2017 together with the Government's response to the consultation on Salary sacrifice for the provision of benefits in kind, have confirmed the announcements in the Autumn Statement regarding the income tax and NIC treatment of BiKs provided via salary sacrifice.

Under the new rules, effective from 6 April 2017 (subject to transitional rules) BiKs provided under salary sacrifice arrangements will be taxed and subject to Class 1A NIC on the greater of the "cash equivalent" (under the existing rules) or the amount of pay foregone. That noted, certain BiKs will not be impacted, including:

  • Pension saving (including related pension advice); 
  • Tax exempt childcare;  
  • Cycle-to-Work schemes;  
  • Purchase of annual leave; and,  
  • Ultra-low emission company cars (with Co2 emissions less than or equal 75 g/kms).

The effect of the new rules will be that the income tax and NIC advantages of BiKs such as mobile phones, company cars (but see below), workplace car parking, discounts on employer's own goods etc will be removed when provided in conjunction with salary sacrifice. 

Key changes since previous proposals

The draft legislation provides clarification on some key areas:

Where an agreement is in place prior to 6 April 2017, the income tax and NIC treatment will be protected ("grandfathered") for a specified period. The length of this period will depend on the type of BiK which is provided under the salary sacrifice arrangements.

In such circumstances, the timing of the changes will be as follows: 

  • Aside from BiKs covered in (b) below, the earlier of when the salary sacrifice arrangement is renegotiated, revised or reviewed and 6 April 2018;
  • For company cars (with Co2 emissions above 75 g/kms), accommodation or school fees, the earlier of when the salary sacrifice arrangement is renegotiated, revised or reviewed and 6 April 2021. 

Where changes have to be made to pre 6 April 2017 arrangements on or after 6 April 2017 due to accidental damage, replacement or reasons beyond the control of either party, or are made due to Statutory Sick Pay, Statutory Maternity/Paternity/Adoption Pay or Shared Parental Pay, these variations and amendments will not cause any grandfathering to be lost.

Finally, the draft legislation sets out what actually constitutes salary sacrifice arrangements. There are two types, A and B: 

  • A Type A arrangement is one under which, in return for the benefit, the employee gives up the right (or a future right) to receive an amount of earnings.
  • A Type B arrangement is one (other than a Type A arrangement) under which the employee agrees to be provided with the benefit rather than an amount of earnings.

It will be particularly important for employers to review the contractual position regarding their various employee benefit packages and the manner in which they are communicated to staff to determine whether they fall within Type A, Type B, or (where the employee has no choice), neither.

Our view

These measures will negate the income tax and NIC advantages for both employers and employees and are expected to increase Exchequer receipts by £85 million in 2017/18 rising to £260 million in 2021/22.

The Government has chosen to press ahead despite the challenges raised by many employers and other interested parties in their responses to the consultation. Indeed, many employers and employees will be disappointed to see the removal of the advantageous treatment for popular BiKs such as company cars, mobile phones, medical screenings and workplace gyms.

However, the Government says that the rising cost to the Exchequer has forced their hand as has the increasing breadth of BiKs offered under salary sacrifice arrangements which now apparently include "white goods, concierge services and double glazing".

We welcome the exclusion of ultra-low emission cars, something we suggested, which means that this change will align better with the Government's policy with regard to protection of the environment as set out in the parallel consultation published by HM Treasury on the taxation incentives that should apply for such vehicles for 2020 and beyond. 

Similarly, the transitional measures for salary sacrifice arrangements agreed prior to 6 April 2017, which protect the income tax and NIC position until 6 April 2018 (and until 5 April 2021 in the case of cars, accommodation and school fees) are also pragmatic albeit that where there is a renegotiation, revision or renewal of the arrangements this protection will be lost (save for "beyond control" changes).

Nevertheless, the targeting of salary sacrifice arrangements will affect a large number of employers and employees, who will see a rise in their tax bills as a consequence. Employers will also need to take steps to review how they provide benefits and reward employees to ensure any benefit provision has considered these new income tax and NIC changes effectively and distinguishes between those arrangements that are impacted and those that are not.

If you would like to discuss these changes further, please get in touch with your normal KPMG contact or email

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