On 10 August 2016 HMRC published a consultation on salary sacrifice for the provision of benefits in kind. The consultation seeks views on limiting the range of benefits in kind that attract tax benefits when they are provided as part of salary sacrifice and flexible benefits arrangements. Certain benefits in kind are said to be ring-fenced and will be unaffected by the proposed limitation. The consultation closes on 19 October 2016.

In the 2016 Budget the Government announced that they were considering limiting the range of benefits in kind (BiK) that attract income tax and National Insurance Contributions (NICs) advantages when provided by way of a salary sacrifice scheme. HMRC have now issued a consultation paper seeking views on the proposal.

The consultation paper highlights the high level of growth in the use of salary sacrifice schemes by employer in recent years. It is estimated that between 2010 and 2015 there was a one third increase in their use. The consultation paper explains that the use of salary sacrifice schemes to pay for BiKs reduces the amount of income tax and NICs due on the employee's pay. This is said to have a number of negative consequences:

  • it costs the Exchequer money;
  • it artificially increases entitlement to tax credits; and
  • it disadvantages employees who are unable to participate and have to fund BiKs via their net pay (e.g. an employee paid at, or near, the National Minimum Wage or National Living Wage from which deductions for salary sacrifice cannot be made if it would reduce their pay below the minimum threshold).

The Government's view is that certain BiKs provided by employers under a salary sacrifice scheme should no longer result in a cost to the Exchequer. Instead, the cash equivalent of the BiK should be treated as general earnings of the employee and be chargeable to income tax and Class 1A employer NICs. The value would be equal to the greater of: (i) the amount of salary sacrificed by the employee; or (ii) the cash equivalent of the BiK specified in the benefits code.

This proposal would impact on a wide range of BiKs provided by employers such as cars, mobile phones, medical insurance and health screening. However, certain BiKs will be ring-fenced and will continue to benefit from the beneficial tax position. The BiKs excluded from the proposal are:

  • employer pension contributions;
  • employer-provided pension advice based on the recommendations of the Financial Advice Market Review;
  • childcare vouchers, employer-supported childcare and workplace nurseries; and
  • cycles and cycle safety equipment which meet the statutory conditions.

The tax treatment of BiKs provided outside of a salary sacrifice arrangement is unaffected by the proposal. Further, the consultation paper confirms that intangible benefits that are not taxed (e.g. additional annual leave or flexible working hours) and Payroll Giving are unaffected by the proposal.


If adopted, the proposal will make it more expensive for employees to purchase BiKs under an employer's benefits scheme as they would have to do so from their net income. That said, it may still be cheaper than purchasing the BiK independently since the employer may be more likely to negotiate a discount from the benefit provider.

The proposal will also increase costs for employers since Class 1A NICs will apply (no employee NICs are due on the vast majority of BiKs). Employers will still be able to operate salary sacrifice schemes for the affected BiKs, but there would no longer be a tax advantage to doing so.

The intention is to introduce the reforms through Finance Bill 2017, which will necessitate changes to the Income Tax (Earnings and Pensions) Act 2003. The current intention is that the change will take effect on 6 April 2017.

Consultation on salary sacrifice for the provision of benefits in kind