Benefits in kind are regarded by employers as a useful tool for rewarding staff. However, the government has recently launched a consultation on restricting their use through salary sacrifice.

Salary sacrifice

Salary sacrifice is a legal method of reducing the amount of income tax and national insurance paid by employers and employees on salary. It works by the parties agreeing a contractual change to terms and conditions so that the employee receives a lower salary in exchange for some form of other non-cash benefit. Once salary is given up it is not chargeable to income tax nor liable for employee or employer National Insurance contributions.

A whole range of benefits may currently be offered through salary sacrifice arrangements from pension contributions to mobile phones.


On 10 August 2016, HMRC launched a consultation on restricting the use of salary sacrifice for the provision of certain benefits in kind.

The purpose of the consultation is to limit the range of benefits in kind that attract income tax and National Insurance contributions advantages when they are provided as part of salary sacrifice or other flexible benefit arrangements.

HMRC has realised that the rapidly increasing use of salary sacrifice arrangements brings about a significant loss of tax income to the Exchequer.

Employees with earnings at or near the National Minimum Wage or the National Living Wage cannot participate in salary sacrifice arrangements because salary sacrifice arrangements cannot reduce an employee's cash earnings below the respective minimum levels. In addition, not all employers offer benefits in kind to their employees.

HMRC does recognise that salary sacrifice arrangements are an important part of an employer's remuneration strategy and wants employers to continue to offer benefits in kind to their employees, but they say they need to ensure a balance of interests to all taxpayers and that there needs to be an even playing field between those that use (and benefit) from such arrangements and those that don't.


The consultation will continue until 19 October 2016 with results and any necessary policy changes being announced in the government's Autumn Statement.

Final provisions regarding any decisions made will be confirmed in the Finance Bill 2017, with any changes to legislation taking effect from April 2017.

What does this mean?

HMRC wants employers to continue to offer benefits in kind through salary sacrifice schemes to their employees. It has therefore confirmed that certain benefits in kind will be unaffected by this consultation, including employer pension contributions, employer-provided pension advice, employer-supported childcare, the provision of workplace nurseries and cycles and cyclists' safety equipment provided under a cycle to work scheme.

Salary exchanged for intangible benefits, such as flexible working or the buying of additional holiday will also be unaffected.

The benefits in kind which are under review in this consultation will include private medical insurance, cars, health screening and the provision of assets such as mobile telephones, TVs, computers and other white goods where offered through salary sacrifice.

The consultation confirms that relevant benefits in kind provided through salary sacrifice will see the tax and employer National Insurance contributions advantages being reduced. Those benefits in kind will become chargeable to income tax and employer National Insurance contributions on the greater amount of salary sacrificed and the cash equivalent specified by statute (if any).

If the government's proposals take effect in April 2017, those employees who have committed to a salary sacrifice arrangement before April 2017 relating to any tax-exempt benefit in kind will be treated as receiving a taxable benefit from that date onwards. The employer will be liable for any corresponding employer's National Insurance contributions charge.

Employers will also be required to report any benefits in kind provided through salary sacrifice to HMRC in the same way that other taxable benefits in kind are reported.

What was therefore a very positive and beneficial arrangement to a number of employees and employers may cease to be so going forward.

Employers are therefore encouraged to:

  • review benefits in kind currently offered and whether they may be affected by these changes
  • liaise with the Payroll and Financial Departments to ensure that they are ready for these changes next year
  • communicate with employees any relevant changes to their pay or tax status as a result of their continued agreement to salary sacrifice arrangements
  • review remuneration strategies to ascertain whether the future offering of benefits in kind continues to fall in line with overall business strategies.