Update on Salary Sacrifice - the tax angles and pitfalls Lesley Fidler 27 February 2014 www.bakertilly.co.uk
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.
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
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.
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 16,800 1600 saving for employee
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)
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 http://www.hmrc.gov.uk/calcs/ccin.htm) Employee s hourly rate falls below National Minimum Wage Employee cannot enter into a Consumer Credit agreement
Salary sacrifice What goes wrong? No change to the employment contract Timings The wrong stuff included Products sold by non-tax salesmen
What s definitely coming
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 2015-16 750m pa cost later
Auto Enrolment
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 2014-15) 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!
HMRC Attention 13
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?
Questions?
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