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Look after the pennies

In these austere times and with tax rises on the way, any tax or national insurance contribution (NIC) saving is a good one. One particularly useful way of mitigating tax and/or NIC is by using what is called a 'salary sacrifice' arrangement.

What is salary sacrifice?

Salary sacrifice arrangements involve a contractual right to cash pay being reduced. For that to happen two conditions have to be met:

• the potential future remuneration must be given up and
• the true construction of the revised contractual arrangements between employer and employee must be that the employee is entitled to lower cash remuneration and a benefit instead.

If that benefit happens to be tax and/or NIC efficient, then both employer and employee are happy!

When is salary sacrifice not effective?

A salary sacrifice is not effective if, in practice, the arrangement enables the employee to continue to be entitled to the higher level of cash remuneration, for example, they have merely asked the employer to apply part of that cash remuneration on their behalf.

What information does an employer need to provide to HMRC?

Whilst employers do not need to confirm anything with HMRC, some businesses might like the comfort of knowing that HMRC agree the new position. In order for HMRC to decide whether a salary sacrifice is effective or not, the employer should provide full details of the scheme and of the new contractual arrangements and satisfy HMRC that:

• the employee's entitlement to cash pay has been reduced and
• a non-cash benefit has been provided by the employer and
• the employer is not simply meeting the employee's own financial commitments.

What sorts of benefits are tax and/or NI efficient?

The list is long and varied but some more mainstream options are included below.

Qualifying beneficial loans

Certain low interest/interest free loans where all the interest is eligible for tax relief are fully exempt from any income tax charges. In addition a loan for any purpose is tax free, provided the total does not exceed £5,000 at any time during the tax year. In such qualifying situations the employer does not have to report the loans on form P11D and employees do not have to claim the corresponding tax relief.

Car parking spaces

The provision of a car parking space at or near the employee's normal place of work - this often includes 'park and ride' schemes.

Bicycles

The provision of bicycles and associated safety equipment for mainly home to work travel.

Employer pension contributions

Contributions to HMRC registered pension schemes.

Mobile phones

One private use tax free phone per employee which could be used to provide a phone to a member of the employee's family or household.

Childcare costs

Employer contracted childcare and employer provided childcare vouchers of £55 per (tax) week.

Training costs

Employer provided training costs.

What do employees need to consider?

When entering a salary sacrifice arrangement to replace part of cash pay with a benefit that is tax and/or NI free, it is essential that employees understand what the sacrifice will mean in practical terms and consider carefully the effect, or potential effect, that a reduction in their pay may have on:

• their future right to the original (higher) cash salary
• any pension scheme being contributed to
• entitlement to Working Tax Credit (WTC) or Child Tax Credit (CTC)
• entitlement to State Pension or other benefits such as Statutory Maternity Pay (SMP)
• proof of earnings for mortgage purposes.

If you have an interest in salary sacrifice, please contact us so that we can discuss matters further.

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