Tax perks sacrificed to save the Treasury £1bn

Millions of workers are to lose tax perks attached to employee benefits such as health checks, gym memberships and mobile phone contracts. Philip Hammond, the Chancellor, said he would tighten rules that allow workers to forgo part of their salary in return for certain work benefits.

He said this “salary sacrifice” system was “unfair” and that from April 2017 the tax benefits of using these schemes will be scrapped.

Currently employees save on tax by paying for these benefits before tax is taken, while employers save on paying National Insurance on the sacrificed wages.

But Mr Hammond said ultra-lowemission cars, pensions savings and advice, childcare and the cycle-towork scheme would be excluded from the tightening in the rules.

Arrangements made before April 2017 will be protected until April 2018, while arrangements for cars, accommodation and school fees will be protected until April 2021.

The Treasury said the growth in these schemes was costing too much in lost income tax and National Insurance contributions.

The move will cost employees and employers £85m in 2017-18, rising to an additional £260m by 2020-21. Over the next six years the move will raise just over £1bn in additional tax.

The following questions and answers explain how these changes will affect employees.

Many employers give staff the option to swap a part of their wage for a non-cash benefit.

As a result of having a lower salary, employees pay less income tax and make lower National Insurance contributions. Likewise, employers save on National Insurance contributions, which are linked to salary.

You can also use salary sacrifice to preserve the £11,000 personal allowance. This tax-free band of income reduces by £1 for every £2 earned over £100,000 – so cutting your salary can boost your tax-free income.

The most popular benefits claimed by staff through such arrangements are pension contributions, meeting childcare costs, bicycle schemes and medical insurance.

In recent years other perks, such as company cars, health screening, gym membership and even mobile phones, televisions and white goods, have become more common.

An employer could offer salary sacrifice to help meet the cost of a mobile phone contract worth £700 over two years, for instance. If the firm reduced the employee’s gross salary by £700, a higher-rate taxpayer would pay £294 less in income tax and NI than they would normally have, while the employer saves £97 in NI. The Treasury loses £391 in tax as a result. For an additional-rate (45pc) taxpayer, the Government loses £426.

Not all firms offer the arrangements. Small businesses, in particular, may not have the resources and budget to set up salary sacrifice systems, even though it creates savings in the long run.

If a benefit is offered only through salary sacrifice, employees whose earnings would go below the national minimum wage as a result are blocked from using it.

Workers who use ‘salary sacrifice’ to reduce tax will lose some of their perks. Laura Suter and Sam Brodbeck investigate

The cycle-to-work scheme will be excluded from the new rules on salary sacrifice