HMRC have produced a consultation paper proposing an end from April 2017 to the tax and NIC savings achievable through sacrificing cash salary for certain benefits. Pension, childcare and cycle schemes are unaffected.


The Government and HMRC have for some time been concerned about the loss of tax and National Insurance contributions where employees agree to reduce their cash salary in return for an employer providing non-cash benefits, often called “salary sacrifice”.

These arrangements range from saving just employees’ NICs (almost all benefits are exempt from employees’ NICs) to saving employer’s NICs and income tax as well, which is the case when the benefit is not taxable at all, e.g. childcare vouchers, pension contributions and benefits such as mobile phones and car park spaces.

According to HMRC, salary sacrifice has grown considerably in the last few years. It has been assisted by technological changes in the platforms which have made it much easier for employers offering these arrangements, and employees taking them up, leading to more benefits being viably offered in this way.

Although this is probably a secondary issue, one of the other reasons that the Government and HMRC are pursuing the proposals is that reducing cash pay can lead to employees making insufficient NICs for benefits purposes and National Minimum Wage problems, although lower cash remuneration can also lead to child and other benefit advantages for employees.

HMRC proposal

Having consulted on salary sacrifice since last year, HMRC have now produced a further consultation paper. HMRC proposes from April 2017 to reverse the tax and employer’s National Insurance savings by making the value of the benefit or the cash salary sacrificed, whichever is the higher, subject to tax and employer’s NICs. There would therefore be no tax and no employer’s NIC benefit in sacrificing salary for a lower taxed or tax-free benefit as the sacrificed salary would still be subject to tax (though there would still be employee savings because the employee NIC savings with benefits would still remain).

The following are other key points:

  • Salary sacrifice arrangements for pensions, certain types of financial advice, childcare and cycle-to work arrangements are not affected by the proposed changes – they can continue to be sacrificed tax and NIC free, although clearly the paperwork and timing of any benefits would still need to be correct.
  • Non-cycle health-related arrangements e.g. gyms or medical insurance would, however, be caught by the new changes.
  • Sacrificing salary for extra holiday, which has become a common benefit over the last few years, is not caught by these new proposals. This is because, technically, it is not a benefit.


The changes only arise where salary is being sacrificed. Many companies operate flexible annual benefits choices, whether their benefits involve salary being sacrificed or just a range of benefits which can be “purchased” (without any cash being receivable). One noticeable feature of the new regime is that there is no exemption proposed for arrangements already put in place, though this is likely to be one of the consultation responses that HMRC receive to make the change manageable for employers.

From the consultation document, it looks as though if cash has permanently been sacrificed, or if there is no choice about receiving cash instead, no change will result from current treatment, but this will need to be confirmed when final proposals and legislation are published. If so, one of the oddities of the legislation will be that if the benefit is provided by the employer from the outset, it will maintain its favourable tax characteristics, but if it has cash sacrificed for it, it will not.


It is probably too soon to take any definitive action at this stage, particularly as many changes end up being deferred by a year. These are also still draft proposals, but as the direction of travel is clear, employers should start thinking about what these likely changes might mean for them, including:

  • Scoping additional employee and employer costs, and whether provision of benefits by way of salary sacrifice is still worth it, which may depend on things such as employer bulk-sourcing discounts and how much the employee values the benefit. Depending on the decisions taken to continue, reverse or amend schemes, how will action be taken? Changing salary sacrifice arrangements should not usually be problematic, but this depends on relevant paperwork and may need time and consultation to take effect.
  • Changing employee communications materials/terms and conditions/handbooks.
  • Changing supplier terms or at least anticipating what changes might be made and whether usage may rise or fall. There can be good non-tax reasons in many cases for sacrificing salary in favour of benefits, not least employees choosing which benefit they would like to enjoy, but the structures of schemes may change. 

Much may also turn on the exact legislation that emerges which is only likely to appear after the consultation ends. Whatever happens, companies will hope that the final form of the legislation and any relevant guidance is in good time to plan for next tax year’s benefits, particularly if companies offer benefits for 2017 at calendar year end and so their 2017 offering will straddle the 17/18 tax year when the change first comes in. An April 2017 implementation date, when final proposals are not yet announced, does seem a tight deadline for all to work to, when the consultation period does not end until October.

Click here to see the consultation paper