Draft Finance Bill - ‘Optional Remuneration’ (salary sacrifice) update

For a while now, the Government has been concerned with what they see as an inequality between those using salary sacrifice to receive a benefit and those who do not. They also feel that there are a great number of employees unable to benefit from such arrangements as they are too close to the National Minimum or Living Wage. They are also concerned with loss of tax revenue and employer’s National Insurance Contributions (NI). From April 2017, new rules will apply when salary sacrificing.

This will mean the value of a benefit sacrificed will be based on the higher of the amount salary sacrificed or the benefit in kind value (‘cash equivalent’). The subsequent value will be subject to Income Tax and employer’s Class 1A NI which is collected by HMRC via the P11D/P11D (b) process.

The intention is not to remove any existing employee NI savings on benefit in kinds, reported on P11Ds, when sacrificing. Also, where a benefit in kind is provided as a core benefit (one funded solely by the company), the current Income Tax and employer NI advantages remain.

The draft Finance Bill now refers to “optional remuneration arrangements” to cover what is affected by the new rules rather than salary sacrifice. Schedule 2 of the draft Finance Bill covers this new addition to Part 3 of ITEPA 2003 as section 69a. The idea of setting a separate definition came during the consultation but its name only appeared in the draft Finance Bill.

There are stated exemptions, transitional rules and some issues still to be ironed out which we cover in this document.

Benefits affected

The main benefits that will be affected by the new rules are:

  1. Health assessments
  2. Mobile phones
  3. Cars
  4. Car parking
  5. Direct product

Although direct product is mentioned above, it is not clear where a company provides its own product/service to its employees whether it is still possible to salary sacrifice the amount above the marginal rate agreed for the product/service and still gain the current income tax and NI advantages. So, for example, if an employee sacrifices £100 for a company product/service but the agreed marginal cost is £20 then the employee only pays tax and employee NI on the £20 and the employer also only pays NI on the £20. The consultation made reference to this but no further detail has been made and no exemption given.

It is worth mentioning that there are many benefits in kind where an employee does not pay NI and it is not the intention of the new rules to affect flexpots/allowance which remain free from tax and NI on the condition that it is not exchangeable for cash.


Broadly speaking the following benefits will be exempt from the changes:

  1. Death and retirement schemes
  2. Pension savings
  3. Company funded pension advice
  4. Bike to work schemes
  5. Childcare vouchers
  6. Ultra-low emission cars
  7. Holiday trading

It seems clear that a death in service scheme is exempted which means an excepted scheme is not.

We are waiting for clarity around whether Group Income Protection will be affected by the changes.

Transitional rules

The overview from HMRC on the draft Finance Bill states:

Employees already in salary sacrifice contracts before 6 April 2017 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

This leaves the question of when is it considered that a variation is in place? For example if a car is selected under a salary sacrifice arrangement in March 2017 it may not be delivered for three months at which point the reduction in salary occurs. A contract variation may have been agreed in March but, strictly speaking, the contract is varied three months later. We are seeking clarity as to when it is deemed to have been set up as, in this example, it was signed up to before 6 April. It is also unclear if one novates their car to a new employer, with no change to the amount salary sacrificed, will it fall under the new regime? Also if a TUPE employee novates, then what happens?

It is worth noting that as salary sacrifice agreements (variation of contracts) fall under employment law, will it be down to HMRC to decide when an agreement is in place or will it based on contract law? Can HMRC contradict the contract law position?


It is important that as an employer you do three things as soon as possible. Review, change and inform.


It is important to review the benefits that you offer, or are considering offering, to your employees to see how they may be affected by the changes being proposed. As a guide, here are some things to think about:


Currently, if an employee receives a bit of tech (tablet or laptop, for example) under a salary sacrifice arrangement, it is a benefit in kind and its P11D value is based on the term of the arrangement. So if the arrangement is over four years, the P11D value is 20%, 20%, 20%, then 40% of the asset value in the final year. If three years 20%, 20% then 60% year three and adjusted accordingly over one or two years (assuming the employee keeps the asset at the end of the arrangement).

An example:

A laptop is selected under a salary sacrifice arrangement over two years. The sacrifice is £50 per month and the laptop cost £1,200.

Year one the P11D value is 20% of £1,200 = £240

Year two the P11D value is 80% of £1,200 = £960

The £240 and £960 will be subject to tax and Employers NI.

Under the new rules the higher amount of the salary sacrifice would apply. Therefore the value would be 25% each year for four years and 33.33% each year for three years.

An example:

Based on the above laptop:

Year one: £600 (12 x £50)

Year two: £600

The £600 each year will be subject to tax and Employer NI.

As you can see, the difference is in the timing of the P11D charge (not the overall amount) which over the period is the same.


Do you offer employees the opportunity to flex up their life assurance? If this is done on an excepted scheme basis rather than using a death in service scheme then it is important to get clarity pre April 2017 that it will still gain the tax and NI advantages it does now. Whilst an excepted scheme could, like a death in service scheme, be deemed a pension as it is not registered, it may not gain the same advantages in the future.


If you allow employees to flex up their group income protection cover you need to await confirmation from HMRC that it will not come under the new rules. It is not mentioned as being included or exempted at the moment so you need to keep an eye on developments.


Whilst holiday buy and flexible hours are exempted, it is not clear whether banking holiday is. It would seem logical that it is, but the reason for exempting holiday buy and flexible hours was to encourage flexible working, which it could be argued banking holiday does not directly do. Regardless, if you do offer this arrangement, ensure you have stringent rules and a trust to keep the banked holiday from being considered received income.


It is also not the intention of the new rules to affect flexpots/allowance which remain free from tax and NI on condition there is no return to pay option. Do you allow a return to pay? If so, review this from April 2017 and consider increasing and expanding your allowances.


If you have a scheme in place and employees set up an arrangement pre 6 April 2017, they have until April 2021 under the current rules unless they alter the agreement. As already mentioned we need to await clarity around when an arrangement is deemed to be in place.

The changes mean that when salary is sacrificed for a car, the tax will apply to the sacrificed amount if higher than the reported P11D value, which it generally is. This removes any employee tax advantage and employer NI advantage on the difference between the amount sacrificed and the benefit in kind value.

If the car is provided as a core benefit (without a sacrifice agreement) there is no change to the current advantage, however the P11D cost is increasing for cars that are not ultra-low emission, though this is not until 2020. This gives you time to move to ultra-low emission cars and we suspect the automotive industry will start to build cars to put on your list.

Although the draft Finance Bill is focused on salary sacrifice, the changes also affect company cars and, more specifically, car/cash allowances. If you offer company cars and/or car/cash allowances to employees then you need to consider the fact that unless you restrict the allowance so it is not exchangeable for cash, the new rules apply. The issue may also arise if you allow trading up on your cars, as the amount above the car grade amount may be seen as a salary sacrifice and subject to new rules. As this would only occur every two to three years or even four years it may be that it could be considered as packaging of salary rather than sacrifice. This would need to be tested.


Having completed your review your will need to look at options. Below are some suggestions that you may consider for your benefits:


It is worth considering whether an immediate asset transfer might be better so the P11D tax is payable straight away and there is no ownership dispute at the end of the contract. You could even consider advancing the employee the tax charged so the cost is spread.


If it is clarified that an excepted scheme does not gain the same advantages, you could consider a death in service scheme for those not affected by lifetime limits and retain the advantages.


As mentioned, it is not the intention of the new rules to affect flexpots/allowance which remain free from tax and NI on condition there is no return to pay option. If you do not currently offer one then you may wish to consider this as an option.


Consider changing the cars on offer for the future. Review the ability to receive cash as an allowance. Look at reviewing trading up.

Where you allow reconstruction (an adjustment of mileage or period) a review of any that may need to do this should be done pre 6 April 2017 to ensure they are not caught out by the new rules.

Anyone due to get an improved car/cash allowance after 6 April should be reviewed to see if they should have one now to avoid the new rules.

If you make no changes, or even if you do, ensure communication is good.


It is really important that you communicate effectively and positively with your employees. A lot of press is announcing the death of salary sacrifice so they need to know the facts and your plan of action. Keep it simple:

  • What is happening: when and what are the transitional rules?
  • Which affected benefits are offered?
  • What will it mean to employees financially?
  • What is your plan of action?


Now that you know which of your current or planned benefits are changing, you need to find a way to make them as efficient as they were. Speak to your advisers as a lot will depend on the benefits that you are dealing with. As experts in this area, we can help position your benefits so they still work or replace them with more attractive alternatives.

It is still possible to use an allowance to benefit from the current tax and NI advantages and there are a number of benefits in kind that still gain the employee NI advantages. Look at what is available and consider adding them to your offering.

Tell us your thoughts in the comments on our blog 'Optional Remuneration’ (salary sacrifice) changes, what does this mean for employers? or contact us if you need advice on how the changes could affect you.