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Hammond raids salary sacrifice schemes

24th Nov 2016
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Chancellor Philip Hammond has used his first Autumn Statement to announce that from April 2017 most salary sacrifice schemes will be subject to the same tax as cash income.

The schemes, where employees exchange some of their salary for a non-cash benefit in kind (such as a mobile phone) to allow both employer and employee to make a tax saving, have been axed in line with suggestions made by the Office of Tax Simplification (OTS).

While millions of employees may be affected by the changes, HMRC estimates project that the measure will only raise £85m in additional tax revenue in 2017/18.


As trailed in the consultation document on the plans, certain types of salary sacrifice schemes will be exempt, including pensions, pensions advice, childcare and Cycle to Work. A last-minute addition was the inclusion of ultra-low emission cars (emitting less than 5% CO2) to the list, a move designed to drive up the government’s green credentials.

All arrangements in place before April 2017 will be protected for up to a year, and arrangements in place before April 2017 for cars, accommodation and school fees will be protected for up to four years.

Mixed reception

While former mobile disco owner Hammond may have hoped business owners and accountants would be dancing to his tune, his salary sacrifice changes have received a mixed reception at best.

The ACCA’s Chas Roy-Chowdhury believes that many workers, low income or otherwise, will be affected by the changes to workplace ‘perks’ such as gym memberships and company cars, and that their reduction could lead to greater pressure on other sectors, such as healthcare, in the long term.

Labelling the changes “a raid not just on the high paid”, EY’s head of tax policy Chris Sanger commented that despite plenty of evidence raised during the consultation period that he was targeting the wrong people, the Chancellor has gone ahead with the changes.

“The denial of relief for the many basic rate tax payers who benefit from salary sacrifice schemes sits oddly with a government committed to helping those who are ‘just about managing’”, said Sanger. “Salary sacrifice has been a great enabler, allowing lower paid employees to choose the benefits they want, something previously only possible for those nearer the boardroom. Denying relief when benefits are chosen in this way will also penalise those longer term employees, compared to new joiners who agree their benefits before they start work.”

Minimum wage calls

The Low Incomes Tax Reform Group (LITRG) welcomed the government’s intention to introduce fairness and coherence to the salary sacrifice rules, but added that unless the lowest paid are also able to benefit from approved arrangements the new regime will be “neither fair nor coherent”.

The group called for the National Minimum Wage Regulations to be amended to allow those on the minimum wage to use approved salary sacrifice arrangements – something currently not permitted.

“Without such a change”, said Robin Williamson, technical director of the LITRG, “the fairness the measure is intended to achieve does not extend to those on the lowest earnings, particularly considering that childcare vouchers and similar approved arrangements might be vital to low-paid workers and that the ‘risks’ to such employees of using salary sacrifice are largely overstated”.

Next steps

Those organisations with salary sacrifice arrangements in place need to urgently review the contractual promises they have made to assess whether, and how, benefits will be continued post-abolition.

Nick Willis, director and solicitor at PwC, commented that salary sacrifice arrangements form part of employees' terms and conditions, and as such “difficult issues” will arise on who will bear any increased cost in benefit provision, and whether an employer has the flexibility to cease providing a benefit that has become prohibitively expensive.

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