- Childcare vouchers;
- Employer contribution to a pension fund for the employee;
- Healthcare; and
- Company Car.
Example 1: Childcare vouchers
Gadgets-2-You Limited
decides to implement a childcare voucher scheme to all employees, based on the
HMRC-approved model. Asif has a salary of £24,000 per year, so is a basic rate taxpayer,
with young children in paid childcare. He could benefit from the vouchers,
which are free of income tax and National Insurance contributions up to £243
per month. (The amount depends on whether the employee is a basic, higher or additional
rate taxpayer on his or her salary).
Asif and the company agree that he will give up some of his monthly
salary, as follows:
Year to 31 March 2015: £
Asif's monthly salary
(gross): 2,000
Less: sacrifice ( 243)
Revised Monthly Salary 1,757
Because he is paid less
cash salary, Asif pays less tax and NICs:
£ £
Income Tax 243
@ 20% = 48.60
NICs 243
@ 12% = 29.16
77.76
per month, or £933.12 annually.
So, Asif gets £243
tax/NIC-free vouchers to replace salary, saving £77.76 in tax and NICs.
However, the good news
doesn’t end there.
Because the vouchers are free of NICs, the company also saves money:
£ £
Vouchers NIC-free to company: 243.00 @ 13.8% = 33.53
Although the cost of Employers' NICs
would have been tax-deductible
against the company's 33.53 @ 20.0% = ( 6.71)
Corporation Tax bill, so effectively
cost 20% less: 26.83
So, the company also saves £26.83 in effective reduced NIC costs - ample to offset any costs of running the scheme. The company stands to save £321.96 after tax, each year.
In the above example, while both parties end up better off, Asif has done far better out of the deal than has his employer. So, the employer could ask Asif to give up a little bit more salary, so that the benefits are more evenly shared. Alternatively, the employer can ‘break even’ and put its savings towards boosting the employee’s cash salary position, as the next example shows.
Example 2: Pension contributions
Martin is Head of Sales
for Widgets-R-Us and has exceeded his annual target to increase orders by 10%.
He negotiates a 10% bonus with his employer which, with an annual salary of
£50,000, works out at £5,000. Martin’s employer warns him that, if his annual
earnings in 2014/15 exceed £50,000 and he or his wife receives Child Benefit,
then the government will ‘claw back’ some of that Child Benefit from Martin,
assuming he is the higher earner.
Martin checks with his
wife who confirms that, with two children under 16, she receives £1,771 in
Child Benefit. Martin stands to lose 40% tax on his bonus as well as 2% NIC, and
may have to pay back £880 to the government in clawed back Child Benefit! Out of a bonus of £5,000, Martin stands to
take home little more than £2,000 and is, understandably, very unhappy.
He discusses the position with his employer, and the company offers to pay the £5,000 plus an amount equivalent to its NIC costs into a personal pension fund for Martin:
£ £
Martin's bonus 5,000
Employer's NIC on cash bonus: 5,000
@ 13.8% = 690
5,690
Assuming the pension
contribution is tax-deductible, (they usually are), the company will be in the
same position after Corporation Tax, whether it pays a £5,000 cash bonus to
Martin, and suffers 13.8% Employers' NICs thereon, or just puts £5,690 into
Martin's pension fund.
Martin's position if the
bonus were paid in cash:
£ £
Gross bonus 5,000
Employee's NIC cost 5,000
@ 2.0%
= ( 100)
Higher rate tax 5,000 @
40.0% = ( 2,000)
High income child benefit
clawback 1,771 @ 50.0% = ( 885)
2,015
So, Martin can have just
over £2,000 in his hand, or almost three times as much in a
pension fund, at no extra cost to his employer. Of course, Martin has to be in
a position where he can afford to live without his bonus: this option only
works if he does not need the cash immediately. (It also assumes he has no
other taxable income or reliefs, for simplicity).
Employer can benefit more
In the above example, Widgets-R-Us quite generously offered to put its entire NIC saving into Martin’s pension pot. It could instead have offered just to pay £5,000, and kept the NIC saving for itself. In fact, as we said earlier, there is generally nothing to stop the employer from offering significantly less: even if the company had offered to put just £3,000 into a pension contribution, Martin would still have been significantly better off.
However, the employee may of course refuse a proposed salary sacrifice and insist on whatever he or she is entitled to under the terms of their employment. There is also a lower limit to what an employer can pay in cash form, as we shall see later.
Conclusion:
We have looked at two tax-favoured non-cash benefits which are commonly offered in exchange for salary sacrifice. The second example demonstrates just how beneficial the alternative can be for an employee and, potentially, the employer, depending on how the savings are shared between both parties. Although an employer may not necessarily know about an employee’s personal financial affairs, employees with combined salary and benefits which approach either:
- the £50,000 to £60,000 band where the child benefit clawback may operate, or
- the £100,000 to £120,000 band where the personal allowance is progressively reduced may find salary sacrifice proposals particularly favourable.
Next month, we shall look at the potential pitfalls to salary sacrifice, and the criteria imposed by HMRC in order to achieve the desired tax efficiencies.
