Written by Payroll Manager, Rebecca Aimey
In today’s competitive job market, employees are increasingly seeking (and often expect) benefits packages to be paid alongside their salary. Employers, on the other hand, are of course keen to retain and attract talent whilst also maximising tax efficiencies where possible. The salary sacrifice options are an effective way for both the employee and employer to benefit, the article below delves into why.
What is salary sacrifice?
Salary sacrifice is an agreement to reduce the entitlement to cash pay or to a salary, usually in return for a non-cash benefit. This must be a contractual agreement, and therefore an employee’s terms of contract must change; they are agreeing to sacrifice a proportion of their salary to take advantage of the benefits without incurring income tax and National Insurance (“NI”).
If the employee opts in/opts out of the salary sacrifice arrangement, an employer must alter their contract with each change, or at least issue a variation of contract letter.
It may also be necessary to change the terms of the salary sacrifice arrangement if there is a lifestyle change in the person’s life, as it may affect their financial circumstances, these include:
A salary sacrifice cannot reduce the salary to below minimum wage.
The salary sacrifice works out as your salary minus the value of the salary sacrifice, this will be your reported annual income.
An example has been provided below:
- An employer offers you a salary sacrifice pension and you are currently earning £50,000 a year.
- You decide to sacrifice £2,500 of your salary to your pension.
- The employer contributes this £2,500 to your pension fund directly.
- You would not pay tax on this contribution, and so your salary would be reduced to £47,500.
For those who have financial applications and mortgages, this is something you will need to consider before agreeing to salary sacrifice. Credit providers typically calculate how much you can borrow based on your salary, and a lower figure may influence how much you can borrow.
Salary sacrifice pension scheme
The pension salary sacrifice scheme is beneficial for both the employer and employee. By agreeing to sacrifice a proportion of their salary, employees can contribute more to their pension funds. These contributions are made before income tax and NI deductions, resulting in immediate tax savings.
Of course, there are thresholds in an individual’s pension pot, so employees will need to keep an eye on this.
The pension salary sacrifice is beneficial for the employer as it reduces the national insurance contributions on the sacrificed amount, it attracts and retains employees and creates a positive brand image. Employers can also give back either all, or a proportion, of the NI savings to the employee to add to their pension pot, further enhancing this benefit.
At Gravita, we are seeing these schemes being set-up for our clients more now than ever.
Cycle to work scheme
The cycle to work scheme can be operated under a salary sacrifice scheme. This is where employers can lend or hire bikes and equipment to employees. This includes:
- Helping employees in purchasing their own equipment
- Lending cycling equipment to employees
- Keeping pool bikes for general use for employees
To set-up a cycle to work scheme, employers must be set-up with a provider to help register the scheme, an agreement will be formed with the provider and the bike shop. A separate agreement will need to be arranged with the employer and employee to reflect the cost and duration of the scheme.
Providing the scheme meets the relevant criteria, it can benefit from tax and NI exemptions. This scheme is particularly appealing given the growing popularity of environmentally friendly commuting options.
The electric car scheme involves employees sacrificing a proportion of their salary for the use of an electric car. Employers must organise the electric car scheme with a provider to get this registered.
As the employee, you can pick the electric car of your choice, which is hired through the employer. This will benefit the employee by saving between 30% – 60% on costs and NI if they decide to use this Government scheme.
Instead of leasing a car from a company and paying directly, the subscription costs is taken from pre-tax pay. This reduces the tax liability and saves the employee more money. There is however a benefit in kind taxable on the employee, to reflect their private use of the business asset. This is currently at a comparatively low rate of 2% of the list price for electric cars.
The childcare vouchers scheme is now closed to new applicants. If you were part of the scheme on or before 4 October 2018 you may be receiving childcare vouchers, again this will save employees on tax and national insurance contributions.
You can now register for a tax-free childcare account online, and for every £8 you pay in, the Government will pay in £2. This is not a salary sacrifice, and if you would like more information on this click here.
If your employer is offering you a salary sacrifice in return for a benefit, your contract must be amended, and you will have to sign to agree these new terms. If this is not done, there will be contractual and compliance issues.
If the salary sacrifice agreement is not set-up properly, it can cause issues with tax relief and contributions that are being paid. Employers must ensure that schemes comply with the rules and regulations set up by HMRC, failure to do so can lead to costly penalties and unfavourable tax implications.
How we can help
At Gravita, we have been working alongside clients who are moving towards implementing a salary sacrifice scheme, providing value for employees by enhancing their benefits while simultaneously maximising tax efficiencies for the employer.
All of these salary sacrifice options are processed through payroll, so please speak to Rebecca Aimey (firstname.lastname@example.org) in our payroll team, who can breakdown how to implement this into your company’s payroll by arranging a preliminary call to understand what you are trying to achieve.