Insights

It was suggested that salary sacrifice schemes were going to be restricted in the last Budget but in the end, they weren’t touched. This means they remain a potentially useful tool for tax planning in order to provide certain employee benefits.

Historically, larger employers have tended to offer a wider range of salary sacrifice schemes, but there is no reason why small to medium sized businesses cannot follow suit. It could be a powerful differentiator in a situation where a smaller business cannot match a higher salary, but with some creativity and salary sacrifice, could attract the best people.

This article explains how salary sacrifice works, the benefits for employee and employer, and offers examples of ways in which salary sacrifice can be used to mutual advantage.

How does salary sacrifice work?

Salary sacrifice works by reducing an employee’s pay in return for a variety of non-cash benefits of an equivalent cost. Often the cost to the employer is lower than the cost would be to the employee, because of the availability of bulk buying or company discounts.

Some benefits, also commonly provided by use of salary sacrifice, are not tax free. These include travel vouchers, medical insurance and potentially cars. The cost of these is deducted from net salary and the advantages to the employee are:

1. The lower cost which can often be achieved by the company; and

2. The ability to pay for the benefit over a period of time, interest-free.

Other benefits have specific tax reliefs attached to them and these can be deducted from gross pay, thus reducing the amount of tax and national insurance contributions (NICs) payable. In some cases it also means reducing income to a lower marginal rate of tax.

The further advantage is that in some cases, the amount of employers’ NICs payable are also reduced, meaning the company can make a choice to pay an amount equal to the NIC saving into the employee’s pension.

What can you buy with tax advantaged salary sacrifice?

The three most common purchases are childcare, mobile phones and bicycles.

• Mobile phones – This enables the employer to provide a company mobile phone to the employee and pay the tariff on the employee’s behalf;
• Bicycles – HMRC have a long running Cycle to Work scheme, which entitles an employer to purchase a bike on the employee’s behalf to a value of up to £1,000. The employee can pay a monthly salary sacrifice amount to ‘rent’ their bike from their employer over a fixed time period of up to 18 months, after which time they can either buy the bike at an acceptable market value, or give it back. Our previous blog explains how this works in detail.
• Childcare – the rules concerning childcare vouchers have changed and we have blogged about it recently. In essence it is possible to purchase vouchers up to a certain value to cover the cost of childcare through registered providers, thereby reducing overall taxable salary. The same benefits of reduced tax and NICs apply for employers and employees. In addition, in some cases, reducing gross salary can also mean an employee becomes eligible to claim child benefits that they would otherwise be excluded from. The issue of childcare vouchers and tax can be explored in detail here: https://www.gov.uk/childcare-vouchers-better-off-calculator.
• Car parking - An employer can purchase additional car parking within commercial car parks at corporate rates and charge the cost to employees by reducing their gross salary.

What might you buy for employees and deduct from net pay?

This will mainly be items that are a ‘nuisance’ or onerous cost to employees, and which the employer can obtain at a discounted rate and spread the cost over a period of time for the employee on an interest-free basis. For example this would include:

• Travel season tickets;
• Gym membership;
• Health insurance; Travel insurance.

What are the possible issues with salary sacrifice?

If you enter into a salary sacrifice agreement with employees, it is important to ensure you have everything contractually right, and are clear on whether the benefits provided are taxable or not. This will have a bearing on whether the cost should be deducted from gross salary or net salary.

Tax free salary sacrifice, bulk buying discounts and the ability to spread the cost for the employee over an extended period are the main incentives and can be well worth taking advantage of. It is also possible to pass employers’ NIC savings on to the employee in the form of pension fund contributions, giving them a further benefit.

For more information please contact Simon Paterson by emailing sp@rjp.co.uk.