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How setting up a salary sacrifice scheme can cut the tax bills for both employees and employers

September 29, 2015

As a small business owner you may not have lots of money sloshing around. You know your staff are your most important asset, but you may not be able to afford to give them a pay rise.

So how can you be an attractive company to work for, motivate and reward staff and promote loyalty without increasing your pay bill?

Believe it or not, introducing employee benefits may be the answer. There is a range of benefits which won’t be a cost to your company and will actually provide savings by reducing your tax liability. These are known as salary sacrifice arrangements.

What is salary sacrifice?

Under a salary sacrifice scheme an employee gives up the right to part of their pay. In return, they opt to receive some form of non-cash benefit which can only be used for the designated purpose.

The employee agrees that their terms and conditions of employment are varied so that their salary is effectively reduced.

For example, if an employee earns £30,000 a year with no benefits, they can agree to change their contract so that they receive £28,800 and 12 Childcare Vouchers a year, each worth £100. This type of arrangement can apply to a number of benefits, for example Childcare Vouchers, a bike for traveling to work or a mobile phone.

Salary sacrifice schemes save on employer National Insurance Contributions

An employee can only take advantage of a salary sacrifice scheme if their pay does not fall below the National Minimum Wage once the deductions have been made.

Under salary sacrifice, employers can save up to 13.8% in National Insurance contributions on any deductions made from employees’ salaries.

Companies usually use a benefits provider to administer their schemes to ensure they comply with HMRC requirements and to minimise any necessary administration. Any service charge levied by the benefits provider will be less than the NI savings, so it is still financially worthwhile.

Benefits that can be included in salary sacrifice arrangements include the following;

Childcare Vouchers

Childcare Vouchers are a very popular benefit. These have been around since 1997 and help over half a million working parents save money on the cost of their childcare.

Savings are made as they are non-taxable and exempt from National Insurance, so the employee saves money as they only pay tax and NI on the remainder of their salary. Employees can choose to sacrifice up to £243 per month (£55 per week) from their wages in exchange for the vouchers. This creates a maximum saving of £933 per year (for basic rate taxpayers) on the cost of childcare for each working parent.

Employers can make the following savings based on 13.8% National Insurance per employee:

Tax Bracket

Monthly Savings

Annual Savings

Basic Rate

£33.53

£402.36

Higher Rate

£17.11

£205.32

Additional Rate

£15.18

£182.16

 

The Childcare Voucher scheme is available to new entrants up until 2017. When Tax-free Childcare, the new non-employer-dependent scheme launches, Childcare Vouchers will only exist for those who are already signed up to the scheme.

Many working parents will be financially better off on Childcare Vouchers. It’s important to ask your employees to consider their options to enable your business to continue to make National Insurance savings.

There are thousands of working parents with great skills and experience and it’s worth remembering that it’s not just those with very young children who need childcare.

Depending on their hours of work, parents of school-age children may have to pay for a childminder at the beginning and end of the school day, an after-school club or a holiday scheme during the long summer break. Childcare Vouchers can be used to pay for all registered childcare for children up to the September following their 15th birthday (16th birthday for children with a disability).

Companies wanting to offer a Childcare Voucher scheme should opt for a provider that is a member of the Childcare Voucher Providers Association, which has a Code of Practice covering areas such as security of voucher funds, integrity of data management, handling complaints and service levels.

One important thing to note is that if you choose to offer a Childcare Voucher scheme, you can’t limit it to certain employees. HMRC rules state that it must be available to your employees “generally”.

Cycle to work

Cycle to work is another tried and tested salary sacrifice scheme which can save employees hundreds of pounds on retail prices for bikes, as well as creating tax savings.

The bike is paid for under a hire agreement paid for with a salary sacrifice arrangement, usually over a 12 or 18-month period. After the agreed period, ownership is transferred to the employee.

Having a cycle to work scheme sends a positive message about your company’s attitude to employees, reduces the need for parking spaces and saves employees the cost of fuel and vehicle maintenance or ever-increasing rail fares. Cycling to work also keeps them fit and has been shown to reduce sickness absence.

There will be a saving for the company up to 13.8% on employers’ National Insurance contributions for each employee on the scheme.

Mobile phones

Another salary sacrifice scheme which is growing in popularity is used to pay for a mobile phone for the employee’s personal use. Under the scheme, a handset may be provided and employees make tax and National Insurance savings on their bill.

They can choose a handset and tariff to suit their needs. As the employer, you can save up to 13.8% of NI contributions on the employee’s monthly deduction. As with Childcare Vouchers, any service charge will usually be more than offset by the savings made.

Other salary sacrifice schemes

There are a number of other schemes which operate in a similar way, each with their own specific rules set by HMRC. These include car leasing, workplace parking, work-related training, computers, holiday trading and health-related schemes. You can choose to offer the scheme/s which best suit the employees at your company.

NB: In all cases, individual employees should check how joining a salary sacrifice employee benefit scheme will affect their entitlement to other benefits such as tax credits, maternity pay and pension. Further guidance can be sought from the employee benefits provider, or HMRC.

About the author

John Woodward is CEO of employee and employer benefits company Busy Bees Benefits, which offers salary sacrifice and other employee benefit schemes to businesses, whatever their size.

More help on ByteStart

For more tips and guidance on managing and motivating your staff, try some of ByteStart’s other guides;

And these will help you tackle tax-related issues;