Salary Sacrifice Rewards You And Your Staff
By David Hewison, Tax Director, Smith & Williamson
As an entrepreneur or owner of a growing business you will always be looking for ways to cut costs. With your wage bill likely to be the biggest drain on your resources, salary sacrifice can be an attractive way to reduce it.
Salary sacrifice is a contractual agreement between employer and employee. It adjusts the mix of salary and benefits in kind provided in an employee reward package. If taxable salary is replaced with one or more exempt benefits in kind – like childcare vouchers – the employee avoids tax and national insurance contributions...
...(NIC) on the salary exchanged, and the employer avoids NIC on the same amount.
The employer’s NIC saving is 13.8% of the salary converted into tax exempt benefits in kind. The rate at which employees save tax and NIC varies according to total annual income and employed earnings, but if tax exempt benefits in kind are involved, the range is currently between 32% and 62% (the top effective rate of tax for people with income between £100,000 to £114,950).
Employer pension contributions (into a registered scheme) are probably the most familiar ‘vehicle’ through which salary sacrifice savings are achieved. This is actually an example of a benefit substitute that achieves NIC savings alone (12% or 2% for the employee, depending on salary level, and 13.8% for the employer) as tax relief is already given on the pension contributions themselves.
Benefits such as qualifying childcare vouchers, providing a mobile phone or settling congestion charges for an employee who commutes using a company car all produce the full tax and NIC savings described above.
Choose benefits in kind carefully
It’s important to choose which benefits in kind your business offers because some produce no savings at all. For instance, a choice of benefits in... continued on page two >