If you read nothing else, read this…
• From 6 April, national insurance contributions (NICs) will increase by 1% for employers and employees.
• Offering tax-efficient benefits such as childcare vouchers, bikes for work and pension contributions via salary sacrifice arrangements can help mitigate the impact of the NI increase.
• Employers are responsible for ensuring their salary sacrifice arrangements are sound from an employment law
perspective, as well as communicating the government’s changes to staff terms of reclaimable value-added tax.
Case study: Northumbrian Water taps savings
Northumbrian Water offers a range of tax-efficient benefits that help its 3,000 employees to make savings.
The water and waste supplier has offered childcare vouchers, bikes for work and holiday buying via salary sacrifice since 2006. In 2008, it brought in a scheme whereby staff can pay their water bills via salary sacrifice, and introduced company car salary sacrifice in October 2009. It also offers a taxefficient share-incentive plan (Sip) allowing staff to contribute from gross salary.
Michelle Legg, compensation and benefits manager, says: “Salary sacrifice has been a part of employees’ language for some time now. When we do our employee survey, we ask what they would like to see in their benefits package, which is how [the] water and the car scheme came about.”
Communication for the current enrolment, which closed on 25 February, is centred on the company’s benefits website, provided by Personal Group, through a voluntary benefits booklet, workplace posters, and a news sheet carrying staff stories about savings made through salary sacrifice.
Legg adds: “Times are tight and people are looking to save, so there has been more interest in how these
benefits can save money.”
With national insurance increases and tax changes on the way, employers can soften the financial blow using salary sacrifice arrangements, says Jennifer Paterson
April will bring more than just showers this year – employers face a deluge of changes that will affect their benefits schemes.†
From 6 April, employee and employer rates of national insurance contributions (NICs) will increase by 1% – 0.5% on top of the 0.5% rise announced in 2008. This could be a significant hit to both employers and employees. But implementing salary sacrifice arrangements around tax-efficient benefits can go a long way to offset the impact of these changes. Alastair Kendrick, director of employment tax services at Mazars, says:
“Under Class 1A NICs, if staff are provided with a benefit instead of cash, there is no employee’s NI, only employer’s. There could be an immediate NI saving to the employee.”
Under salary sacrifice, an employee agrees to give up a portion of their gross salary in return for a benefit that is free of tax and NI for them, and free of NI for their employer. These arrangements are often included in voluntary benefits packages through schemes such as childcare vouchers, bikes for work and pensions.
With employers’ NI increasing from 12.8% to 13.8% in April, such arrangements appeal to them, too. Glenn Elliott, managing director of Asperity Employee Benefits, says: “Any salary sacrifice product, like childcare vouchers or bikes for work, reduces employers’ NI by the amount sacrificed.” He explains this means that if an employer can get an extra 100 staff into a childcare voucher scheme, it can save £1,700 off its NI bill (assuming a 6% provider charge, and an average spend of £210 a month per employee).
However, childcare vouchers also face a number of changes. From 6 April, only basicrate taxpayers will receive tax and NI relief on up to £55 a week towards childcare vouchers. Tax relief will be restricted to £28 a week for 40% taxpayers and £22 a week for 50% taxpayers, for staff who take up the benefit from this date. Existing users will be unaffected. Paul Bartlett, managing director of Grass Roots Group, says: “There is a double incentive for a higher-rate taxpayer who is not taking advantage of childcare vouchers to do so now.”
Childcare vouchers offer savings for both employer and employee. Julian Foster, managing director at Computershare Voucher Services, says: “From an employer’s NI savings point of view, for someone saving the
full amount (£243 a month), employers will save £402 NI per year for each employee in it, after the changes come in. The key driver is to increase participation before 6 April. The NI savings are great, but employers should also look at it from an employee’s perspective: everybody can save up to £243 a month if they join before 6 April.”
Bikes for work can also bring NI savings. Employers buy bikes for staff, who then fund them from their gross income via a salary sacrifice arrangement, before tax and NI are deducted. Higher-rate taxpayers can save 52% off the shop price of a bike, and basic-rate †taxpayers could obtain a 40% discount.
However, offering a benefit such as pension contributions via salary sacrifice through voluntary benefits will have a much wider impact because it applies to more staff, says Mark Collins, national head of the employer consulting group at Baker Tilly. “Employers should look to maximise pensions if they can,” he says. “If an employee currently has an employee pension contribution, they are not getting NI relief on that. So what most employers do is turn it into an employer contribution. If an employee is paying a 5% contribution, they give up 5% and the employer pays an extra 5%.”
Employers could also look at other areas to mitigate the impact of the NI increase, such as offering work-related training and qualifications through salary sacrifice. Karen Thomson, associate director of policy, research and strategic visibility at the Chartered Institute of Payroll Professionals (CIPP), says: “Say an employee wants to do a
foundation degree in payroll and it costs £1,500, and the employer says it will support them doing it but cannot afford to pay for it.
If the employee paid for it on a monthly basis, it would be coming out of their net pay. Take off £1,500 from their gross salary because they sacrificed it, the employee does not pay tax or NI on that, neither does the employer.”
Mobile phones offer another opportunity. Grass Roots’ Bartlett says: “Employees used to take mobile phones basically to enjoy the tax break. They would take relatively lowspec phones, but now smart phones, iPhones in particular, have driven a different agenda. An iPhone costs £400, so the NI savings for employers and staff make it worth doing.” Car parking, holiday trading, health screening and voluntary group risk products can also be offered tax-efficiently via salary sacrifice. Mark Eaton, director of Personal Group, says: “We hope to see an increase in our voluntary group income protection product, which encourages staff to take control of their own sick pay. The employee is taking responsibility once the organisation’s sick pay runs out, and the organisation gets the cherry on top – employer’s NI savings.”
Once an employer has decided which taxefficient benefits to implement, it has to ensure it complies with current employment law. Mazars’ Kendrick says: “Employers considering salary sacrifice should make sure what they are putting in is robust from an employment law and a tax/NI perspective. HM Revenue and Customs has been poking around these schemes, so it is important that an employer ticks all the boxes.”
An employer must also fully understand what a true salary sacrifice scheme is, says Thomson. “HMRC wants to increase the amount of NI paid, and when employers use salary sacrifice to reduce that, who knows what might happen. Employers must ensure they know what they are doing and, if they don’t, they should seek independent advice.”
With a month to go before the NI increases start, employers should be communicating the changes to staff. Baker Tilly’s Collins says: “Employers do not tend to feel obliged to tell their employees about the changing tax rules because there is enough of it in the press. But it will encourage employers to look at salary sacrifice more closely because savings† increase as the NI rates go up.”
Eaton adds: “When organisations go to their payroll professionals to pitch for what they want to do, the NI increase will make the business case slightly stronger. They still need all the other bits, like communication, to make sure take-up is still going to be high.” So employers should take action now, says Bartlett. “There is the issue staff will not recognise the change, which puts pressure on employers to make it known and offer staff ways of maximising their spending power, highlighting things they would normally purchase, but in a way that reduces NI.”