What's salary sacrifice?
Salary sacrifice is an agreement between the employer and employee on making an arrangement to reduce an employee’s cash pay in return for non-cash benefits like a company car, increased pension contribution, childcare vouchers or similar kind of benefits. This can be done by changing the terms of employment in employee’s service contract. Employees need to agree to this arrangement made by the employer.
This arrangement cannot decrease employee’s cash earnings below the National Minimum Wage rates. It has been seen that the arrangement proves beneficial for the employees.
What is a salary sacrifice scheme?
Paying wages is the common way of rewarding employees in any organisation. Your employees work for you and in return you pay them gross wage at the end of every month, which is then subject to Tax and National Insurance deductions, keeping aside the net wage.
Salary sacrifice scheme can help employees improve their lives and hence many employers plan to bring its employees to this agreement.
Basically, whatever money is left after Tax and National Insurance deductions, employees spend that on their basic necessities and other livelihood needs.
Salary sacrifice schemes are beneficial for employees as they get rewarded in an alternative way.
The consequence of this scheme is employees are happy and employers are able to create a profitable business and happier work environment.
Since salary sacrifice does not attract Tax and National Insurance charges, it ends up becoming beneficial to employees too.
How to reduce your income tax and national insurance?
If you are taking salary sacrifice, it will benefit you in saving tax on the overall salary. The impact of tax deduction and National Insurance charges will depend on the cash and non-cash benefits you have agreed on during the salary sacrifice arrangements made by your employer. As an employee you need to make an accurate calculation of the amount you need to pay and deduct as tax and national insurance charges for the cash you receive and as an employer you need to pay and deduct tax and national insurance on the basis of benefits you provide.
The cash component for the PAYE system needs to be operated correctly for your payroll.
Non-cash Benefit - Evaluate and Calculate
You need to evaluate the value of the benefit you took in the form of a non-cash benefit.
For the plan set up on a new salary sacrifice implemented from 6 April 2017, you will have to calculate the worth of a non-cash benefit by using the higher of the:
- amount of the salary you sacrificed
- earnings charge under the normal benefit in kind rules
Though, for cars with CO2 emissions of not more than 75g/km, you must always use the earnings charge under the normal benefit in kind rules.
Non-cash Benefits - Tax and National Insurance Reliefs
In salary sacrifice schemes, tax relief on benefits in kind doesn’t apply.
The benefits that are not required to be calculated for a salary sacrifice schemes, as they are not needed to be reported to HMRC, are:
- payments into pension schemes
- employer provided pensions advice
- childcare vouchers
- workplace nurseries
- directly contracted employer provided childcare
- bicycles and cycling safety tools (including bicycle to work)
Report a non-cash benefit
Reporting requirements for both non-cash profits and cash earning benefits are different. Whatever be the reason, the benefits must be reported to HM Revenue and Customs (HMRC) at the end of the financial year. Use the end-of-year expenses and benefits online form to report the benefits earned from both cash and non-cash earnings.
How salary sacrifice works
Under a salary sacrifice scheme, the employee gives up a certain amount of cash salary in return for a non-cash benefit. Usually the benefit taken in exchange for the salary is one for which a tax exemption is available. However, the scheme can also be used in relation to taxable benefits to take advantage of the NI savings available to the employee by replacing cash salary (which is liable to employee and employer Class 1 contributions) with a non-cash benefit which is liable to employer-only Class 1A contributions.
- Knowing the benefits for both the employee and the employer, many organisations are coming forward now offer salary sacrifice schemes.
- The reason is very simple and useful for both parties hence most of the time both agree without many complications in paper work. Employee sacrifices a part of the salary and in return employer rewards you non-cash benefits, in the form of voucher for childcare or car finance.
- Salary sacrifice scheme makes your overall cash pay lower, further lowering your tax deductions and National Insurance charges.
- Additionally, employer will not require paying their Employers’ National Insurance contributions on he sacrificed part of the salary.
- Many times employers forward some or all of these savings to the employees, which benefits the organization in creating a happier work culture.
- If you have sacrificed a part of your salary means you have earned less. This might also affect your maternity pay or mortgage requests.
- State Pension or contribution-based state benefits might also get affected due to lesser salary. However, you will save on tax deductions and exemptions.
- Lesser salary also means, any life cover through a scheme at work would also become less. It is always recommended that your check with employers the benefits you may get without a salary sacrifice. If your benefits are more if you don’t agree on salary sacrifice then don’t go for it.
Salary sacrifice calculator
The aim of a salary sacrifice calculator is to figure out how the scheme will work from the perspective of both employee and employer. The purpose of the salary sacrifice is to have neutral impact on the employer. The calculator has to be set with all possible circumstance and consequences thereafter to reach a neutral effect on the employer.
First, there should be an option to input current gross salary prior to salary sacrifice and based on that adjustment of the assumptions if any only if necessary.
Next, page should show the impact of the sacrifice i.e. situation before and after the sacrifice of the salary. This will give an idea about the benefits employee and employer gets in tax relief and national insurance charges.
Also, do check the future tax impact. The tool helps in evaluating all the possibilities and reaching a beneficial decision.
Car Salary Sacrifice Schemes
Using the Car Salary Sacrifice Scheme is becoming very popular amongst employees due to the benefits associated with it. The scheme allows employees to sacrifice a part of their monthly wages and return they get a new car.
With this scheme in place, employees get safe and maintenance-free car, and employers get the benefits of meeting the compliance of their duty-of-care necessities under the Corporate Manslaughter and Homicide Act 2007. The scheme not only helps in creating a happy and healthy work culture within the office, it also helps employers in retaining employees who are locked into the scheme for a period of two to three years.
Examples of salary sacrifice
|Salary||Salary sacrificed||Non cash benefit received||Consequence|
|£350 per week||£50 of that salary||Childcare voucher to the same value||Only £300 is subject to tax and NICs. Both Tax and Class 1 NICs up to the limit of £55 per week from Childcare Voucher are exempted|
|£350 per week||£100 of that salary||Childcare vouchers to the same value||£295 is subject to tax and NICs - PAYE is operated on the £250 cash component, childcare vouchers are exempt from both tax and Class 1 NICs up to a limit of £55 per week, £45 is reported as a non-cash benefit at the end of the tax year using forms P11D or P9D|
|£5,000 bonus||£5,000||employer contribution of £5,000 registered under pension scheme||No employment income tax or NICs charge to the employee - the full amount is invested in the pension fund|
Let’s understand in detail through an example:
Rose’s employer operates a salary sacrifice scheme enabling employees to swap cash salary for non-cash benefits. Rose takes advantage of the scheme by giving up £2,860 of cash salary p.a. in exchange for Childcare Vouchers.
Benefits to Rose:
As Rose is a basic rate taxpayer, she can take advantage of childcare vouchers of up to £55 per week free of tax and NI.
By swapping cash salary (subject to both tax and NI) for a tax- and NI-free benefit, Rose saves: tax at £572 (£2,860 @ 20%) and NI at £343.20.
Rose is £915.20 a year better off!
Benefit to Rose’s employer:
Employer saves Class 1 NI of £394.68 on the foregone salary.
Salary sacrifice arrangements can benefit everyone! Childcare costs are an obvious way to take advantage of the scheme, but another way to benefit is through a Cycle to Work Scheme, that would include the cycle and all the other paraphernalia. There are others, but please get in touch if you’re interested in exploring the options further.
How salary sacrifice affects payments and benefits?
Payments on Incomes
The calculation of incomes from payments related to overtime rates, pay rises, occupational pension contributions, etc. are decided by the employees. Whatever be the payment based on speculative salary or reduced cash salary employee’s consent is must in both.
Benefits on Incomes
Benefits like Maternity Allowance and Additional State Pension that employees are entitled to, could be affected due to salary sacrifice. They might lose the entitlement of these benefits or may get lesser amount as compared to the full standard rate.
Benefits based on Contribution
Employees’ right to contribution based benefits like Incapacity Benefits and State Pension can also get affected after salary sacrifice. The cash incomes on which NICs are billed may also be reduced after salary sacrifice. Therefore, employees may have to pay – or believed to be paying – less or no NICs.
Statutory income that employees get can also be affected after salary sacrifice. Some employees may lose the entire benefit from Statutory Pay. The employer doesn’t have to make any statutory payments to employees if salary sacrifice treatments reduce average weekly income of employees below the lower income limits.