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Pre-Budget Report: canteens funded by salary sacrifice hit by tax exemption changes

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The Government is to cut back tax efficiencies on workplace canteens funded by salary sacrifice.

Speaking yesterday in his Pre-Budget Report speech, the chancellor of the Exchequer, Alistair Darling, said legislation to be introduced in 2011 to remove the tax exemption for workplace canteens provided in conjunction with salary sacrifice arrangements.

The Government claims it made the decision because the arrangement benefits only a minority of employees. But the arrangement will continue in workplace canteens subsidised by employers.

Mike Nagle, tax director at PricewaterhouseCoopers, said: "This draws a line from 2011 under the current uncertainty regarding the tax relief available for canteen arrangements linked to salary sacrifice. We are in contact with HMRC regarding a number of existing arrangements."

James Verner, sales director, at Vebnet, added: "The changes to pensions tax relief in the 2009 Budget highlights the importance of communicating an organisation's benefits package to employees effectively. With the rules of salary sacrifice always being adapted, there has never been a better time to improve your communications strategy through the use of digital media, as well as online and hard copy total reward statements.'

Salary sacrifice allows an employee to give up part of their pay in exchange for an alternative non-cash benefit. It offers tax and National Insurance (NI) savings, allowing greater employee benefits (such as pensions) at no extra cost to the employee or employer. Salary sacrifice is growing in popularity, both as a way of making pension payments and for other benefits such as childcare vouchers. The changes to NI in 2011 make it even more tax-efficient.

Income tax is calculated on the lower (sacrificed) salary - a saving of 20%, 40% or 50% of the amount sacrificed. In addition NI is paid on the lower salary. After the increases in 2011, this will give a saving of 12% of earnings below £43,888, and 2% of earnings above that level. The employer will also save 13.8% NI and many employers use some, or all, of this saving to boost the employee's pension contribution.