Changes to salary sacrifice tax rules | KPMG | UK
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Changes to salary sacrifice tax rules

Changes to salary sacrifice tax rules

The 2016 Autumn Statement included important changes to the income tax and national insurance contribution (NIC) treatment of certain benefits in kind. The changes, which take effect from 6 April 2017, will see the income tax and NIC increase on some benefits provided to employees as part of a salary sacrifice scheme. However, there is finally certainty over which arrangements will not be subject to different tax or NIC treatment by HMRC.


Head of Social Housing

KPMG in the UK


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What is changing?

The current legislation states that some benefits are tax exempt, so that no income tax or NICs are due on the value of the benefit in kind provided to employees.

Under the new rules, where the benefit is part of an optional remuneration arrangement, the value of the benefit for tax purposes will be the greater of:

  • The cash equivalent as set out in tax legislation; or
  • The cash forgone in relation to the benefit (in other words, the value of the salary sacrifice)

This change effectively means there will be no more income tax and employer NIC savings from operating salary sacrifice arrangements (although employees can still benefit from employee NIC savings). 

However, there are two exceptions. First, some benefits are excluded from the new rules. Second, there are transitional rules for arrangements in effect before 6 April 2017.


The following benefits are excluded from the new rules and so not subject to income tax or NICs:

  • Childcare (including childcare vouchers and employer-provided childcare)
  • Cycles
  • Ultra-low emission vehicles including company cars (ULEV*)
  • Pensions
  • Retraining courses and outplacement services
  • Intangibles, e.g. buying annual leave

*CO2 emissions less than 75 g/km

All other benefits provided under optional remuneration arrangements will be affected. These include popular schemes such as car parking, mobile phones, health assessments and company cars that do not meet the ULEV definition above.

Transitional rules

Where an agreement is in place prior to 6 April 2017, the income tax and NIC treatment will be protected (“grandfathered”) as follows:-

  • For company cars (with CO2 emissions above 75 g/km), accommodation or school fees, the earlier of when the salary sacrifice arrangement is renegotiated, revised or reviewed and 6 April 2021;
  • For all other benefits, the earlier of when the salary sacrifice arrangement is renegotiated, revised or reviewed and 6 April 2018.

The tax treatment will also be protected if the salary sacrifice arrangements are revised because of 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.



The new rules are complex. But, crucially, they do not spell the end of salary sacrifice. Flexible benefit schemes are an important element of an organisation’s reward strategy. Many benefits offered via salary sacrifice through flexible benefit schemes already attract income tax and employer NIC charges but offer attractive discounts to employees. 

However, housing association employers need to urgently revisit their reward strategy to:

  • Identify existing schemes that may be affected by the changes
  • Review take up of affected schemes
  • Review scheme rules and contracts with providers to protect the grandfathering arrangements for benefits that currently attract a tax and NIC saving
  • Identify whether take up can be improved on the excluded benefits
  • Quantify the cost for employees and employers and timing for the introduction of the new rules for all schemes
  • Implement processes during the transitional period to monitor affected schemes
  • Communicate with employees and providers

Finally, employers should also review company car schemes to establish whether any cash allowances in lieu of a car will fall within the new rules.

Other important changes

In addition to the above, new rules for the tax treatment of termination payments and the operation of PAYE Settlement Agreements  have also recently been announced and will take effect from April 2018.

For details of these changes, please visit our Employer’s Club. You will also be able to find details here about the changes to the legislation relating to the engagement of workers via personal service companies by public sector bodies. This applies from 6 April 2017, although only to entities covered by the Freedom of Information Act 2000. It will therefore not impact most housing associations at this stage. 


Caroline Laffey

+44(0) 191 4013849

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