Salary sacrifice is a tax strategy designed to offer alternatives to cash made available to staff in return for them accepting a non-cash benefit.
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Why would they do this?
Salaries are subject to PAYE tax and National Insurance for both the employee and the employer. Having less salary means paying less tax and NI. Therefore this sounds attractive. However, if we replace the salary (or part of it) with an alternative, that alternative is subject to tax and NI too. The savings come where there are special tax and NI applications attributable to that alternative.
What benefits are there that have a tax advantage?
There are many rules and we do not intend to list them all here, but here are a few ideas;
Payments into pension schemes
Employer provided pensions advice
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 much savings are we talking about - and who saves?
For high-earning staff in the 40% bracket, looking to bring their salaries down to the lower threshold, there’s a potential combined saving of 42%. This is made up of the 40% tax and the 2% NI charge.
Where staff are in the lower bracket of 20%, the savings could be up to 32% made up of the tax at 20% and NI at 12%.
But it’s not just the staff that benefit. The employer benefits too. The employer has a reduced salary bill - therefore saves employers NI at 13.8%
So what’s the catch?
Having a reduced salary means that your earnings that count towards other benefits are also impacted. For example, maternity allowance and additional state pension. If lowered too far you could lose out on these altogether. You should also pay careful attention to the national minimum wage and ensure that the revised pay situation doesn’t leave you falling foul or underpaying.
How do I put this in place?
The employee and employer need to agree to a revision to the salary package. A salary sacrifice means giving up the right to a certain benefit (ie the salary). Once that right is given up, the entitlement to it is also gone. In return for this, the employer offers the employee the benefit in kind. That benefit may in turn have other terms associated with it - such as a company car policy etc. Once the legal are handled, it’s time for the accounting.
Firstly we need to know how expenses and benefits are reported. Most companies have not registered for benefits by payroll - but can do so here -> payrolling benefits and expenses online service .
If the company has not yet registered with HMRC for ‘benefits by payroll’ the following applies;
On a staff members payslip, the new reduced pay should be entered. It’s important not to show the original and then a deduction as that suggests that the pay is not in fact ‘sacrificed’. The new payroll should be processed as normal.
At the end of the payroll year, the benefits should be reported on a P11D form.
If the company has registered for benefits by payroll, the same applies as the above, but the monthly value of the benefit is added to the payslip and no P11D is required.
What is a P11D form?
A P11D is an annual return done just after the annual payroll year ends. It’s a report of the expenses and benefits on each employee made by the employer to HMRC. Different benefits have different tax and NI treatments.
When these are completed and sent to HMRC, a copy should also be given to the staff member. They may need this if they do self-assessment tax returns.
HMRC will review the P11D returns and adjust the employee's tax coding notice accordingly to reclaim any tax due. If the benefits are free from tax and NI, there will be no adjusted coding notices.
What if I am uncertain about the NI treatment
Ask HMRC to confirm the tax and National Insurance contributions If there is a point of uncertainty you can contact the HMRC clearance team. HMRC will not comment on a proposed salary sacrifice arrangement before it has been put in place. To be satisfied that the change has been effective at the right time and not applied retrospectively, HMRC would need to see:
evidence of the variation of terms and conditions (if there is a written contract)
payslips before and after the variation
How can I get help setting up a Salary Sacrifice scheme?
Finance Box has the know-how for the payroll and P11d process and can be on hand to help you put this system in place. Everything we do is digitised and easy to pull together. Speak to us if we can offer you any assistance.