The range of benefits that can be offered under salary sacrifice arrangements has expanded in recent years and the advantages for employer and employee are considerable, says Tom Washington.
Salary sacrifice arrangements around tax-efficient benefits allow staff to swap part of their gross salary for a non-cash benefit provided by their employer. Typically, these are offered as part of a voluntary or flexible benefits package, and enable employees to save tax and national insurance on the perks, while their employer also saves up to 12.8% on national insurance contributions (NICs) on the portion of the employee’s gross salary that is sacrificed.
In tough economic times, although the cost of salary sacrifice arrangements to an organisation is small, they have a high perceived value among staff, particularly lower-paid workers. Mark Carman, marketing and communications director at Motivano, says: “Such schemes cost the employer little but get across to staff the fact that the employer knows times are hard and wants to try to extend employees’ spending power.”
For example, childcare vouchers give working parents a tax-efficient way to cover childcare costs on the first £55 a week. As well as supporting staff financially, the vouchers also help them return to work after the birth of a child, saving the employer on the time and cost of recruitment.
Cycle-to-work schemes and bicycle loans have grown in popularity since being introduced by the government in 1999 under its green travel initiative. These benefits allow staff to sacrifice a portion of their gross salary in exchange for an employer’s agreement to supply them with a bicycle and related accessories on loan for a set hire period, normally 12 months. The deductions are made from gross salary, so are free from tax and national insurance (NI). Such schemes can generate savings of up to 50% on a new bike.
Pension contributions can also be made via salary sacrifice to take advantage of tax efficiencies. Richard Doig, total reward consultant at Heath Lambert, says this is becoming increasingly popular as employers look to cut pension costs, especially at a time when pension liabilities are growing rapidly. Although salary sacrifice for pensions has traditionally been used in defined contribution schemes, there is a growing trend among employers to use it for defined benefit schemes, says Doig.
Switching a pension scheme to salary sacrifice delivers significant NI savings, not only to the employee but also to the employer, generating a pot of money to use as they wish. “Some reinvest NIC savings back into the employee pension pot, while some use it to offset the cost of implementing the scheme or maybe to subsidise private medical insurance,” says Doig. “Others split the savings between themselves and employees.”
While pensions, bikes for work and childcare vouchers remain the stalwarts of salary sacrifice perks, several other benefits have arisen, with varying degrees of success. Within the past year, a number of employers and providers have looked at enabling staff to buy bus passes through salary sacrifice, although implementation is not straightforward. Lesley Fidler, tax director at Baker Tilly, says: “Bus passes are becoming more prevalent, but there has to be a single bus company providing the service. You also need a lot of staff living inside the bus catchment area.”
Salary sacrifice can also be set up for on-site staff canteens, with staff making tax savings by sacrificing part of their gross salary to spend on food and drink, typically via a pre-paid card.
Some organisations have used salary sacrifice to offer tax-efficient car parking at, or near, the workplace, which can bring hefty savings for staff who drive to work. A number of employers also pay for staff training through a salary sacrifice arrangement, but this is permitted only if the training is linked to the employee’s role at the organisation.
Employer-purchased annual health screenings, which can also be offered via salary sacrifice, can help to prevent long-term employee absence. HM Revenue & Customs has confirmed such screenings will be exempt from tax, as well as NI, from 6 April 2009. Offering group income protection via salary sacrifice also enables employers to pass on to staff some of the cost associated with long-term absence.
A popular benefit among staff is salary sacrifice for extra annual leave. These schemes allow employees to buy additional leave and pay for it over 12 months via salary sacrifice.
Employers that are seeking tax-efficient ways to add value to their benefits package certainly have a number of options to choose from under salary sacrifice.
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- Under salary sacrifice, staff give up the right to receive a portion of salary, which is instead used to provide a benefit, typically, free of tax and NI for them.
- Employers also save up to 12.8% on NI contributions on the portion of the employee’s gross salary that is sacrificed.
- Tax-efficient perks offered via salary sacrifice include bicycle loans, childcare vouchers, pension contributions, work-related training, health screening, and bus passes to travel to work.