Tax-efficient benefits offered through a salary sacrifice arrangement are exempt from income tax, employer’s NI and employee’s NI. This is so because a benefit offered in this way reduces an employee’s pay, so less tax and national insurance is due and the employer will not have to pay NI contributions on the portion of salary that the employee sacrifices.
Here is a rundown of the employee benefits that offer tax and NI efficiencies.
Pensions
An occupational pension scheme, registered with HM Revenue and Customs (HMRC), offers several tax advantages:
- An employer’s contributions are allowed as a deduction against its profits for corporation tax purposes and are not taxed as benefits as regards employee’s or employer’s NI.
- If the employee contributes to the scheme, then these contributions, up to a maximum of 100% of earnings, are allowed as a deduction against the employee’s taxable income.
- There is a lifetime limit on any employee’s tax-exempt pension savings. This is set at £1.5 million for 2013/14, reducing to £1.25 million from 6 April 2014. Any excess above this limit is subject to a lifetime allowance charge of 25% tax (for group personal pension or stakeholder schemes) before being applied to provide taxable benefits. If the excess is taken as a lump sum, for example £2 million, it will be taxed at 55%.
- However, if an employee has built up a large pension pot, they can apply for protection from the lifetime allowance which is to fall to £1.25 million, but must do this by 5 April 2014. This will allow them to maintain a lifetime allowance of £1.5 million, but only if they make no further pension contributions after 5 April 2014.
- There is also an annual allowance limit on tax-relieved pension savings, which is capped at £50,000 for 2013/14. Employer and employee contributions above the annual limit are taxed at the highest rate the employee pays: 20%, 40% or 45%. The annual limit will be reduced to £40,000 from 2014.
- No income tax and no capital gains tax is payable on income arising from investments held in a self-invested personal pension (Sipp).
- Pension scheme members receive tax relief at 20%, 40% or 45% on personal contributions, subject to HMRC limits and tax status. Up to 25% of members’ pension funds may be taken as a tax-free cash sum at retirement, subject to the lifetime allowance.
- Employees could also save tax and NI contributions by sacrificing salary or bonus in exchange for their employer paying an equivalent pension contribution, which reduces both employer and employee NI contributions, and income tax for the employee.
Company cars
The value of the benefit of an employer-provided car is calculated as the new price published by the manufacturer, plus value-added tax (VAT), delivery, number plates and any optional extras. The employee is then liable to pay tax on a percentage of the P11D value decided by the car’s carbon dioxide (CO2 ) emissions .
Two new company car tax bands will be introduced by the government, at 0-50g/km and 51-75g/km of CO2 :
- The appropriate percentage of the list price subject to tax for the 0-50g/km CO2 band will be 5% in 2015-16 and 7% in 2016-17.
- The appropriate percentage of the list price subject to tax for the 51-75g/km CO2 band will be 9% in 2015-16 and 11% in 2016-17.
The government is also commited to maintaining a three percentage point differential between the 0-50g/km and 51-75g/km CO2 bands, and between the 51-75 and 76-94g/km bands. From 2018-19 and 2019-20, there will also be a two percentage point differential between the 0-50 and 51-75g/km bands and between the 51-75 and 76-94g/km bands. The exact band rates are yet to be released.
However, the lower a car’s CO2 emissions, the lower the benefit-in-kind tax bill will be for employees.
Tax-free loans
The threshold for tax exemption on employment-related taxable cheap, low-cost or interest-free loans, such as travel season ticket loans, is currently set at £5,000, but from 2014-15 will increase to £10,000. As long as the total outstanding balances on these loans do not exceed the threshold at any time in a tax year, there will be no tax charge. This will come into effect on 6 April 2014.
Information provided by Tax Briefs Advantage
If an employee invests in a share incentive plan (Sip) and keeps their money in the plan for five years, no income tax or NI contributions will be payable when the employee acquires the shares.
- An employee will also not have to pay capital gains tax (CGT) on shares sold, but if the shares are kept, CGT may have to be paid if they increase in value. There is an annual exemption of £10,900 before the tax is paid.
- The personal investment limits of sharesave schemes will double from £250 to £500 a month from April 2014. Also, the maximum value of shares an employee can acquire with tax advantages through share incentive plans (Sips) will rise by £300 a year to £1,800 for partnership shares and to £3,600 a year for free shares.
- The government will provide an annual exemption from income tax on bonuses or equivalent payments on amounts up to £3,600 paid to employees of organisations that are indirectly employee-owned. This is part of a package of government measures to provide an additional £25 million to support employee ownership , announced in Chancellor George Osborne’s 2013 Autumn Statement.
- Income tax is payable on a gain taken from a share scheme option. This is taxed at 18% up to £32,010 and at 28% from £32,011.
- Employers can give employees up to £3,000 worth of free shares in any tax year, and employees can buy £1,500 worth of shares (or up to 10% of their income for the tax year, if less) before income tax and NI are deducted.
Bikes for work
Under a salary sacrifice arrangement, the payment for a bike for work comes out of an employee’s gross, rather than net, pay. Because the employee’s wages are reduced slightly over the payback period, the typical saving for a standard-rate taxpayer is 32% and for higher-rate taxpayers it is 42%.
On average, employers can save 13.8% of the total value of the salary that employees sacrifice because of the consequent reductions in their NI contributions.
Employees can save up to 42% tax if this benefit is offered through a salary sacrifice arrangement. Also, the charges that employers pay for a bulk screening programme are lower than an employee would have to pay individually. The employer will save on the 13.8% employer NI contributions, with the cost of the screening recovered via deduction from employees’ pay.
Example of tax and NI savings for health screening
| Basic-rate taxpayer (1) | Higher-rate taxpayer (2) | |
Health assessment cost | £500 | £500 |
Tax and NI saving | £160 | £210 |
Net cost | £340 | £290 |
Monthly cost | £28.33 | £24.16 |
(1) Assumes employee pays tax at 20% and NI at 12%.
(2) Assumes employee pays tax at 40% and NI at 2%.
Source: HM Revenue and Customs (HMRC)
Employees can save on NI contributions if gym membership is offered via a salary sacrifice arrangement. If an employee is a basic-rate tax payer, they save up to 12% when paying for gym membership via salary sacrifice, but those in the higher-rate band will save only 2%.
This does not include employees that have access to an on-site gym on their employer’s premises.
Healthcare
A tax exemption is to be introduced on amounts of up to £500 paid by employers for medical treatment for staff who have been on long-term sick leave. It will apply to recommendations by the government’s Health and Work Assessment and Advisory Service and extends to employer-arranged occupational health services. It is intended to help employees return to work. The government will introduce the legislation in the Finance Bill 2014, which is likely to take effect in autumn 2014.
Childcare vouchers
Childcare vouchers provided as an employee benefit are exempt from income tax and NI contributions on up to £55 per week or £243 per month per employee. But from 2015, childcare vouchers will be replaced by a tax-free childcare scheme that provides working families with 20% of their childcare costs, up to £1,200 for each child.
Tax advantages of childcare vouchers
| Level of tax employee pays | Tax-free voucher limit |
|---|---|
Basic-rate tax | £243 a month |
Higher-rate tax | £124 a month (if employee joined the scheme on or after 6 April 2011). If the employee joined before then, the limit is £243 a month. |
Additional-rate tax | £110 a month (if employee joined the scheme on or after 6 April 2011). If the employee joined before then, the limit is £243 a month. |
(Source: HMRC)
The reason for the limits is to ensure no employee receives more than £11 a week in tax relief. So, 20% x £55 = £11, 40% x £28 = £11.20 and 45% x £24 = £10.80.
National insurance contributions
Employees pay national insurance contributions (NICs) if they earn more than £149 a week. The amount they pay is 12% of their earnings above that limit, up to £797 a week. The rate drops to 2% of earnings above that amount.
Employers pay 13.8% NICs on all wages they pay to employees. However, in April 2014, the NICs Employment Allowance will knock £2,000 off most, but not all, employers’ annual NICs bills.
Information provided by Tax Briefs Advantage
Income tax rates
- Personal allowance: £9,440 (basic), rising to £10,000 in 2014/15.
- 20% on annual earnings above the PAYE tax threshold up to £32,010.
- 40% on annual earnings from £32,011 to £150,000.
- 45% on annual earnings above £150,000.
