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Sweeping changes made to salary sacrifice rules

31st Mar 2017
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Kate Upcraft outlines the changes made to salary sacrifice schemes from 6 April, and highlights government clarifications and potential grey areas around the legislation.

New name

The first challenge is to stop using the phrase “salary sacrifice”, which we have used since the tax exemption for employer-supported childcare in 2005 ushered in a new approach to benefits provision. Now we must call such arrangements OpRAs (Optional Remuneration Arrangements). But it’s so much more than a rebranding...

Two types

There are two types of OpRAs outlined in Finance Bill 2017 and the accompanying draft guidance in the Employment Income Manual released on 20 March.

  • Type A arrangements are where an employee gives up the right, or the future right, to receive an amount of earnings in return for a benefit. This is how childcare vouchers have been delivered as a salary sacrifice since 2005.
  • Type B arrangements are where employees are provided with a benefit rather than choosing to receive a cash allowance, for example choosing a company car rather than a car allowance.

It was a surprise when HMRC outlined that the type B arrangements would be caught by the new rules, as employers had not previously viewed them as a salary sacrifice.

What to do now

Employers and tax advisers need to establish which OpRAs an employer currently has, which ones are unaffected, and which ones are afforded a temporary reprieve where new contracts are in place before 6 April 2017.


There is no change to the treatment of benefits provided in addition to salary as they are not part of an arrangement where the employee gives up some salary. These will continue to be taxed as benefits in kind and subject to Class 1A NIC for the employer.

A few are subject to Class 1 NIC through payroll or are exempt from tax and NIC, such as workplace training or professional subscriptions. Employers can also still provide a benefit fund that employees can spend on a range of benefits which suit their personal circumstances, as long as the employee cannot reduce/increase their base salary.

Temporary reprieve

For all other benefits provided via OpRA the tax treatment will change. OpRAs that are in place before 6 April 2017 are given some transitional protection:

  • Agreements for cars (with emissions over 75g per kg), living accommodation and school fees will be protected until 6 April 2021
  • Agreements for all other benefits will be protected until 6 April 2018


There is a potential trap. Other than for school fees the temporary protection will fall away, and the new rules will apply immediately if the employee’s OpRA is renegotiated. This means where the contract of employment has been amended.

The definition of a contract change is a review or renewal of an OpRA other than:

  • for reasons outside the employee’s control, such as having their mobile phone stolen and needing it to be replaced, or;
  • as a result of taking a statutory leave entitlement such as maternity.

Recognising that school fees increase most academic years the transitional protection will last until 6 April 2021 for arrangements entered into before 6 April 2017 (if the agreement is for the same child at the same school, i.e. working for the same employer).

Good news

Politically popular benefits are protected and can still be provided as type A or B arrangements.

However, I would caveat any future scheme rules and explanations to employees, to point out that the scheme may need to be withdrawn or amended at any time, if the law changes. Employees should be under no illusion that the tax and NIC planning opportunities of OpRAs are in the gift of the Government, not the employer.

Protected benefits

These are:

  • Employer pension contributions and employer-provided pension advice, which is an enhanced £500 exemption from 6 April 2017;
  • Employer-supported childcare, e.g. vouchers and workplace nurseries;
  • Counselling and other outplacement services;
  • Retraining costs, such as a result of redundancy; 
  • Bicycles and safety equipment provided under a cycle-to-work scheme; and
  • Cars with CO2 emissions below 75mg/km.


Following publication of the draft Finance Bill 2017 we are now clear that:

  1. Where previously tax-exempt benefits are provided via an OpRA from 6 April 2017, such as a mobile phone, the cash equivalent value will be the salary given up, as we have no existing formula for valuing a previously tax-exempt benefit.
  2. For company cars, loans, vouchers, living accommodation and vans, including where the employee chooses the benefit rather than a cash allowance, the “modified cash equivalent value” is the higher of cash equivalent value of benefit (with no reduction for any amounts “made good”), or the salary given up. Whichever is the higher figure is then reduced by any made good value such as a private contribution towards a car.
  3. Where an employee agrees to an OpRA in exchange for a mileage allowance which is higher than the mileage allowance payment (45p or 25p/mile), the additional amounts are to be taxed as cash.
  4. OpRAs for group income protection are now caught by the new rules even where the employer is the beneficiary of the ensuing payout from the policy.

Grey areas

We are not clear whether additional death-in-service cover can continue to be provided via an OpRA, if it’s part of the rules of a registered pension scheme, or whether all OpRAs for death-in-service are now taxable. 


All employers who use salary sacrifice will be under pressure to put in place new contracts before 6 April 2017 to take advantage of the grandfathering provisions and to communicate these changes to employees. Those employers who payroll benefits in kind also need to be able to calculate the appropriate cash equivalent value for inclusion in the April payroll.

It will be interesting to see when HMRC begins to consult with employers and payroll software providers on the inevitable changes to the design of the P11D for 2017/18.

Replies (11)

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By gbuckell
03rd Apr 2017 14:54

What about salary sacrifice for extra paid holidays?

Seems harsh if it does apply but I lean towards the view that it does.

If it does then what about the scenario where a person requests a change from full time to part time working? Arguably that is no different from buying extra holidays.

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Replying to gbuckell:
By neiltonks
04th Apr 2017 09:19

The new rules don't apply to schemes where the benefit is something intangible, such as extra holidays. Such schemes simply mean that the employer agrees that the employee works fewer hours and therefore receives proportionately less pay.

Thanks (1)
By gbuckell
04th Apr 2017 10:13

I hope you are right. But do you have any backing for this view? In the Finance Bill benefit is defined as including "any benefit or facility, regardless of its form
and the manner of providing it" which strikes me as wide enough to embrace extra holidays. I can see nothing in the Employment Income Manual (link in main article) that addresses this issue.

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Replying to gbuckell:
By neiltonks
04th Apr 2017 10:32

There is something of a problem in that the guidance is , shall we say, still a little sparse! The best I can find is the statement on page 6 of the consultation response, which says "There will be no change where salary is sacrificed in return for intangible benefits such as additional annual leave....". The document is at

Thanks (2)
Replying to gbuckell:
By psimonparsons
06th Apr 2017 22:47

There is no change in value, hence it is not affected. So the employee will be taxed and pay Class 1 NICs on the payment received.

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By gbuckell
04th Apr 2017 11:02

Thank you for the link. It is reassuring but the phrase "intangible benefits" makes me nervous as it includes the word benefit. As stated there is nothing I can see in the draft legislation that excludes this. Unless I have missed something (again!) may be the legislation will be amended or HMRC "interpret" the meaning of benefit not to include an intangible one. It is interesting that the original question refers to extra annual leave as not strictly involving the receipt of a benefit. When is a benefit not a benefit? When it is intangible!!

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Replying to gbuckell:
By neiltonks
04th Apr 2017 11:08

It's certainly not HMRC's intention to bring these arrangements into scope. As to whether they've succeeded in this objective with the wording they've used in the regulation is something we'll have to leave the lawyers to decide!

Thanks (1)
By ruth.julian
06th Apr 2017 15:58

Is there anything about "salary sacrifice" in exchange for travel and subsistence allowances?

Thanks (0)
Replying to ruth.julian:
By psimonparsons
06th Apr 2017 22:45

The amount of the OpRA will be subject to P11D tax and Class 1A.

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By psimonparsons
06th Apr 2017 22:51

Marginal benefit. HMRC policy have indicated that the comparison is on the amount of OpRA cash v the marginal benefit. The indication, for example, is that were a 2x life assurance is freely given to all employees, but through OpRA arrangement an employee could increase that to x4 cover, the comparison is between the amount sacrificed and the marginal cost difference.

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By MJShone
10th Apr 2017 12:06

Thanks for flagging up the trap Kate. All other commentary I've seen talks about people in existing OpRAs as at 5 April 2017 being protected until 6 April 2018. It looks as if schemes with an annual renewal date pre 6 April 2018 will be caught. So if your OpRA date is, say, 1 May 2017, the new rules apply from 1 May 2017, not 6 April 2018. That appears to be the case even if the arrangements don't actually change eg an employee currently gives up £50 a month in gross pay in exchange for car parking. The flexible benefits scheme renewal date is 1 May 2017. The employee elects to carry on with the current arrangement which still costs him £50 a month from gross. If the employer actually pays £75 plus VAT a month, the employee, with effect from 1 May 2017, is taxed on £90 a month.

Have I got that wrong?

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