Many benefits, including childcare vouchers up to the exempt limit and mobile phones, can be provided free of tax and National Insurance contributions (NIC). While a tax-free benefit is valuable in the hands of the employee, if the employer simply provides this in addition to the employee’s regular wage or salary, the employer is left to meet the cost of the benefit.
By using a salary sacrifice arrangement it is possible for the employer to pass the cost of the benefit to the employee, and for the employee to save tax and NIC and the employer to save NIC. This is advantageous where the employee would have otherwise met the cost of what is now being provided as a benefit-in-kind from their post-tax salary.
What is a salary sacrifice?
Under a salary sacrifice arrangement, the employee gives up cash salary for a tax and NIC-free benefit. The employee saves the tax and NIC on the salary given up, and the employer saves the employers NIC.
A word of caution – care must be taken to ensure that the salary sacrifice arrangement is effective. For an effective salary sacrifice, the employment contract should reflect the revised arrangements, and the employee must not be able to revert back to the higher salary at will. HMRC are looking at salary sacrifice schemes, and some exemptions do not apply where the benefit is provided by means of a salary sacrifice arrangement.
What benefits can be provided in this way
The use of a salary sacrifice arrangements to allow employees to swap cash salary for a benefit-in-kind is most effective when the benefit taken instead is exempt from tax and NIC. Where this is the case, the employee will save tax and employee’s NIC and the employer will save employers’ NIC. Benefits which fall into this category include childcare vouchers, mobile phones and parking at or near the workplace.
However, from the employee’s perspective, a salary sacrifice arrangement is also effective even if the benefit is not exempt from tax. This is because most benefits-in-kind are liable to Class 1A NIC rather than Class 1 NIC, and Class 1A NIC is an employer-only charge. Swapping cash salary for a benefit-in-kind will move the NIC charge from Class 1 to Class 1A, saving the employee primary Class 1 contributions. Although there is no saving for the employer, there is a cash flow benefit in that Class 1A contributions are not due until 19 July following the end of the tax year.
Example: Provision of a mobile phone
James spends £35 a month
of his post-tax salary on a mobile phone contract. To take advantage of the tax
exemption for mobile phones, James and his employer enter into a salary
sacrifice agreement where James agrees to give up £420 of his annual salary in
return for the provision of the mobile phone.
His employer takes out a
new phone contract, which is between the employer and the mobile phone company.
In the above example, James is a higher rate taxpayer. He saves tax of £168 (£420 x 40%) and NIC of £8.40 (i.e. £420 x 2%) as a result of swapping cash salary for the exempt benefit of a mobile phone – a total saving of £176.40. James’ employer also saves NIC of £57.96 (i.e. £420 @ 13.8%).
Practical Tip:
The opportunity to take advantage of salary sacrifice schemes may be limited, as increasingly HMRC are denying availability of tax exemptions where the benefit is made available via a salary sacrifice arrangement. This is already the case for the exemption for free and subsidised meals, which does not apply where the meals are made available under a salary sacrifice arrangement. The new exemption for qualifying reimbursed and paid expenses, which replaces the dispensation regime from 6 April 2016, is similarly denied where expenses are paid or reimbursed under a salary sacrifice arrangement.
Many benefits, including childcare vouchers up to the exempt limit and mobile phones, can be provided free of tax and National Insurance contributions (NIC). While a tax-free benefit is valuable in the hands of the employee, if the employer simply provides this in addition to the employee’s regular wage or salary, the employer is left to meet the cost of the benefit.
By using a salary sacrifice arrangement it is possible for the employer to pass the cost of the benefit to the employee, and for the employee to save tax and NIC and the employer to save NIC. This is advantageous where the employee would have otherwise met the cost of what is now being provided as a benefit-in-kind from their post-tax salary.
What is a salary sacrifice?
Under a salary sacrifice arrangement, the employee gives up cash salary for a tax and NIC-free benefit. The employee saves the tax and NIC on the salary given up, and the
... Shared from Tax Insider: Using Salary Sacrifice Schemes To Save Tax And NIC
