While the national job vacancy boom is good news for job seekers, it could be a nightmare for businesses keen on retaining high-quality staff.
While a pay rise is always welcome it may not always be the most tax or National Insurance efficient approach when compared with other benefits, including salary sacrifice, that could be as effective in persuading key 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 and bus passes or even funding a new car.
Other examples of common 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, both parties must agree on what the cash value of the benefits on offer is worth to ensure the benefit fairly compensates the employee for their loss of income.
Sacrifice arrangements tend to remain in place 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. For the cash component, which means operating the PAYE system correctly through your payroll.
Calculate a non-cash benefit
For any non-cash benefits, you need to work out the value of the benefit by using the higher of the:
- Amount of the salary given up
- Earnings charged under the normal benefit in kind rules.
For cars with CO2 emissions of no more than 75g/km, you should always use the earnings charge under the normal 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 also 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, please get in touch with us.