From 6 April 2017, new rules largely remove the income tax and employer NIC advantages of optional remuneration arrangements. This includes standard salary sacrifice arrangements as well as any arrangement where benefits are provided in return for giving up earnings (e.g. flexible benefits packages with cash options).
Where the new rules apply the taxable value of the benefit in kind provided is the higher of:
- The cash pay given up by the employee, or
- The taxable value of the benefit under the normal benefit in kind (BIK) rules.
There is limited ‘grandfathering’ - arrangements entered into before 6 April 2017 continue to be subject to the old rules for salary sacrifice until the earlier of:
- 6 April 2018 (6 April 2021 for cars, living accommodation and school fees), and
- The time the arrangements are varied, renewed or modified.
Certain benefits are excluded from the new rules, including:
Those which already have specific salary sacrifice rules (e.g. the exemption for paid or reimbursed expenses).
- Cycle to work
- Ultra-low emissions cars (less than 75g CO2/km).
Further information on the changes to the taxation of optional remuneration arrangements can be found in HMRC’s guidance here.
Voluntary payrolling under the new rules
The PAYE Regulations which cover voluntary payrolling of benefits have not yet been amended for this change to the treatment of optional remuneration arrangements.
As a result some employers may be payrolling the tax on salary sacrifice arrangements but identify that a P11D is still due. HMRC have therefore introduced a concession for 2017/18. If an employer:
- Registered for voluntary payrolling before 6 April 2017, and
- Is deducting tax from a BIK subject to the new rules
there is no need to complete a form P11D provided they deduct the correct tax due under the new rules and return the information through their RTI submissions by the end of the tax year.
Employers still have to work out the Class 1A NICs on the taxable value and complete form P11D(b).
This concession only applies for 2017/18 - it is intended that the PAYE Regulations will be updated in time for the start of 2018/19.