While the national job vacancy boom is good news for job seekers, it is a potential nightmare for businesses keen on retaining high-quality staff.
While a pay rise is always welcome by many, it is not always the most tax-efficient approach for business owners. Other benefits, such as salary sacrifice schemes, are equally effective in persuading your employees to stay put.
Salary sacrifice enables employees to exchange part of their salary for a non-cash benefit from their employer, such as increased pension contributions, mobile phones, season tickets or even funding a new car.
Other examples of salary sacrifice benefits include:
- Childcare vouchers
- Cycle to work scheme
- Car hire/lease scheme
- On-site nurseries
- Car parking
- Gym membership
- Pre-paid store cards
- Personal learning
For each salary sacrifice arrangement, the cash value of the benefit must be agreed to to ensure the employee is fairly compensated for their loss of income.
Sacrifice arrangements should remain fixed for at least 12 months unless the employee experiences a lifestyle change.
Effect on tax and National Insurance contributions
The impact on tax and National Insurance contributions payable for any employee will depend on the pay and non-cash benefits that make up the salary sacrifice arrangement.
You need to pay and deduct the right amount of tax and National Insurance contributions for the cash and benefits you provide. You must operate the cash component correctly through the PAYE system.
Calculate a non-cash benefit
For any non-cash benefits, you need to work out the value by using the higher of the:
- Amount of the salary given up
- Earnings charged under the standard benefit in kind rules
For cars with CO2 emissions of no more than 75g/km, you should always use the earnings charge under the benefit in kind rules.
The only benefits you do not need to value and do not have to report to HMRC for a salary sacrifice arrangement are:
- Payments into pension schemes
- Employer-provided pensions advice
- Workplace nurseries
- Childcare vouchers and directly contracted employer-provided childcare that started on or before 4 October 2018
- Bicycles and cycling safety equipment (including cycle to work)
How to set up a salary sacrifice scheme
As an employer, you can set up a salary sacrifice arrangement by changing the terms of your employee’s employment contract. Your employee needs to agree to this change.
A salary sacrifice must not reduce earnings below National Minimum Wage rates.
As the UK braces for a rise in National Insurance rates, many professionals see the use of salary sacrifice arrangements as a way of potentially reducing contributions – especially the provision of an electric company car.
For expert advice on salary sacrifice schemes, seek professional advice and contact our employment tax team today.
Link: Salary Sacrifice
