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Salary Sacrifice

14 January 2016
 

Have you ever thought about offering salary sacrifice schemes to your employees?  The idea behind this is very simple. The employee gives up part of their salary and, in return, you give him/her a non-cash tax free benefit, the most popular being childcare vouchers, additional employer pension contributions and cycle to work schemes.

The benefit to you as an employer is the reduction in the amount of National Insurance Contributions (NICs) you need to pay to HMRC.  Why?  Well, an employer pays NICs on employees' salaries but not on pension contributions, childcare vouchers or cycle purchase payments. The higher the salary, the more you need to pay in NICs. Reducing your employees' salaries by way of offering an eligible salary sacrifice benefit instead of salary would therefore mean you're paying less in NICs. So, if you have a large workforce, you can achieve a substantial saving.  At the standard rate of 13.8% of gross salaries, introducing a salary sacrifice scheme which reduces your gross salary bill by £10k per month would reduce your employers NIC by £1380 per month. Quite a saving!

The benefit to the employee is that, by sacrificing some of their gross salary in return for a tax free benefit, their overall taxable salary is less, so they pay less personal tax and National Insurance.  In addition, a salary sacrifice for childcare vouchers can reduce relevant pay for working tax credit purposes, as the value of these benefits is not included as income. All sounds good, doesn’t it!  However, the employee also needs to be aware that there may be a downside, as sacrificing part of their salary means they will “earn” less, which may affect their maternity pay, or give them an issue when applying for a mortgage.  Lower earnings may also affect their State Pension or contribution-based state benefits such as Jobseeker’s Allowance and Employment and Support Allowance. Plus they need to be careful about any life cover provided through a scheme at work as this could be less if it’s based on a lower salary, depending on the conditions of the scheme.

So, with potential tax saving benefits to both employers and employees, salary sacrifice is definitely worth considering as part of a full remuneration package for employees. However, employers need to be aware that they need full agreement from employees, as the introduction of salary sacrifice amounts to a change in their contractual terms.

For more information, please contact Carol Wright at cwright@springfords.com.

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