Tax and NI savings are no sacrifice

Inventive schemes which deduct gross salary can pay value-for-money benefits, as Clare Bettelley explains


The UK may be officially out of recession, but it is likely to be some time before many of us can stop worrying about our diminishing disposable income.

Salary sacrifice, though, is a relatively easy way in which employees can save money through their employers on the services they already purchase.

The arrangement, which requires a restructuring of staff contracts of employment, quite literally involves an employee sacrificing a portion of their gross salary in return for a non-cash benefit and, for those benefits that attract such treatment, making significant tax and National Insurance (NI) savings along the way.

Here’s how. Basic-rate taxpayers (earning between £7,592 and £42,484 a year) will save 12 per cent of the amount of salary they sacrifice in NI; higher-rate taxpayers will save 2 per cent. In addition, employees do not pay tax on the salary they sacrifice.

It’s not unusual for an employer, with childcare vouchers in particular, to hand back all their NI savings to the employee

Crucially, employers can also make NI savings; every £1 an employee sacrifices amounts to a saving in employer NI of 13.8p. A number of employers pass this saving on to their workforce, but many opt to use these savings to finance the administrative costs of running the schemes or simply to reduce their wage bills.

“It’s not unusual for an employer, with childcare vouchers in particular, to hand back all their NI savings to the employee,” says Martha How, principal at Aon Hewitt. “It’s a very nice childcare policy [for employers to adopt].”

Childcare vouchers are the most popular benefit that employers offer through a salary sacrifice arrangement. The vouchers, which are available to working parents, are tax and NI-free for a maximum of £243 a month for basic-rate taxpayers and £124 a month for higher-rate taxpayers.

But childcare vouchers are misunderstood by many people, according to James Malia, head of employee benefits at P&MM Employee Benefits. “There’s a big educational need here because it’s amazing how many people don’t use childcare vouchers.” The vouchers can be used for an Ofsted-registered childminder, nanny or nursery, as well as for school holidays for children up to the age of 15 or 16 if they are disabled.

Bikes-for-work schemes are another popular benefit employers can offer through salary sacrifice. This involves an employer buying bikes and loaning them to employees for commuting to work.

Basic-rate taxpayers can reduce the cost of a bike by 32 per cent in tax and NI savings, and higher-rate taxpayers can save 42 per cent through the scheme. Similarly, there are favourable tax breaks on cars bought through salary sacrifice, particularly for low-emission models.

Employees – and employers – can also make NI savings on pension contributions through a salary sacrifice scheme. According to Capita Employee Benefits, an employee contribution of £80 to a group personal pension would be grossed up by 20 per cent basic-rate tax relief, so that £100 is actually invested. Basic-rate taxpayers will, therefore, not see any difference in their tax bill if contributions are switched to a salary sacrifice basis, but they will benefit from the NI saving.

Another employee benefit to consider, which can generate tax and NI savings, is buying and selling holiday entitlement, while bring-your-own-device schemes enable staff to buy a computer or smartphone for less than they would pay on the open market.

CASE STUDY

Philips UK puts car scheme on the road

In June 2011, Philips implemented a salary sacrifice car scheme to enhance the benefits on offer to its staff and increase employee engagement.

The scheme offers employees at all levels throughout the UK, working either at its headquarters, manufacturing sites or in the field, access to a wide range of cars. Popular models include the Fiesta, Citroen DS3 and MINI.

So far more than 100 vehicles have been ordered through the scheme by the company’s 2,000 UK employees. Nicolas Bedard, procurement manager UK for Philips, says: “The great thing about the scheme is that it provides flexibility in the vehicles offered, meaning there is a car to suit every lifestyle.”

The cost benefits of the scheme include all car-related expenses being bundled into one monthly payment. “This helps the employee to have peace of mind about any vehicle-related costs for the next 24 to 36 months. No unexpected payment will have to be made throughout the lease period,” Mr Bedard says.

“On top of that, these vehicle rentals attract high manufacturer discounts obtained through Philips’ overall buying power. The monthly rental is taken out of the employee’s gross salary, which means that the related benefit-in-kind payments are largely offset by paying less tax and national insurance.”

And the scheme is cost-neutral for Philips, he says.