Update on Salary Sacrifice - the tax angles and pitfalls

Transcription

1 Update on Salary Sacrifice - the tax angles and pitfalls Lesley Fidler 27 February

2 Salary sacrifice: why does it work? Why can t the employee just buy it out of net pay? Employer can source more cheaply Taxable benefit is (usually) based on the cost to the employer, and/or No employee s NICs on employer-provided benefits Asymmetry in the tax system It is a tax-free benefit when the employer provides it, and/or It is a NICs-free benefit when the employer provides it but not when the employee sources it personally.

3 Salary sacrifice: how does it work? Need something that is either tax and/or NICs free when employer-provided, OR costs the employer less than the employee would pay AND the employer does not want to suffer the cost but is willing to help the employee

4 Salary sacrifice: the basics Change the employee s contractual remuneration package e.g. a) 25,000 pa becomes b) 20,000 pa plus an MBA course at 5k a) 25,000 would be fully taxable, plus Ee s and Er s NICs. No tax relief for study costs paid personally b) Employer-provided, work-related, training is tax- and NICs-free. So, only 20k taxed and NIC d. Saving tax and NICs on 5k.

5 No salary sacrifice After salary sacrifice Salary 25,000 20,000 Er s NICs (13.8%) 3,450 2,760 MBA fees - 5,000 Cost to employer 28,450 27,760 Saving 690 saving for employer Salary 25,000 20,000 PAYE (est) (3,000) (2,000) Ee s NICs (est) (1800) (1200) Net pay 20,200 16,800 MBA fees (5,000) - Cost to employee 15,200 16, saving for employee

6 Salary sacrifice After giving up gross salary of 5,000, employee has 3,400 less net salary, but the MBA course provided After paying 5,000 less as a salary, employer has saved employer s NICs of 690 If the employee wanted to spend 5,000 of net pay, gross pay of 7,353 would have been needed (with employer s NICs of 1,015)

7 Salary sacrifice What are the downsides? Additional administration: P11D forms Demonstrating the benefits to employees/overcoming suspicion Reduction in cash pay could affect lenders decisions Reduction in cash pay likely to reduce salary-related benefits Occupational pension contributions PHI cover Ongoing entitlement to benefits during statutory leave periods Interaction with Tax Credits (see Employee s hourly rate falls below National Minimum Wage Employee cannot enter into a Consumer Credit agreement

8 Salary sacrifice What goes wrong? No change to the employment contract Timings The wrong stuff included Products sold by non-tax salesmen

9 What s definitely coming

10 Childcare voucher changes Employer Supported Childcare becomes the Tax-free Childcare Scheme Autumn 2015 Initially up to age 5, later 12 20% of costs, max 1,200 per child per year Better than ESC? Opt in to TFCS Not for 45% taxpayers Not for UC claimants Workplace nurseries remain tax- and NICs-free No new joiners to ESC 400m cost m pa cost later

11 Auto Enrolment

12 Pensions auto-enrolment Pension contributions can be employer s or employees Both (within limits) are tax-free Only employer s pension contributions are NICs-free Employees earning <UEL ( 41,865 in ) have already paid 12% NICs on the income they use for pension contributions (2% >UEL). Employers pay no NICs on pension contributions they make. Why not switch from employees contributions to only employers to help fund some of the additional cost of auto-enrolment? NB Pensions advice is needed!

13 HMRC Attention 13

14 Possible HMRC attention Cycle to work Second-hand value Qualifying journeys Available to all employees provision for under-18s? Buses to work Why/for which employers does this work?

15 Questions?

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