Could a salary sacrifice scheme cut my tax bill?

29th May 2018 News, Tax Nicola Roby

As a small business owner you recognise that your staff are an important asset but perhaps you don’t have the cash to give them an immediate pay rise. At CHW Small Business Accountants in Bolton we understand that whilst small business owners are unlikely to have lots of money sloshing around to pay employees, we recognise staff are the most important asset in any business, and it’s important to keep them happy.

Nicola Roby, at CHW Small Business Accountants tells how as an employer you can you be an attractive company to work for, motivate and reward staff and promote loyalty without increasing your taxes.

There’s a range of benefits which won’t be a cost to your business and will actually provide savings by reducing your tax liability. These are known as salary sacrifice arrangements.

So, what is salary sacrifice?                                            

Under a salary sacrifice scheme an employee gives up the right to part of their pay. In return, they opt to receive some form of non-cash benefit which can only be used for the designated purpose.

The employee agrees that their terms and conditions of employment are varied so that their salary is reduced.

An employee can take advantage of a salary sacrifice scheme if their pay does not fall below the National Minimum Wage once the deductions have been made.

Under salary sacrifice, employers can save up to 13.8% in National Insurance contributions on any deductions made from employees’ salaries.

Companies usually use a benefits provider to administer their schemes to ensure they comply with HMRC requirements and to minimise any necessary administration. Any service charge levied by the benefits provider will be less than the NI savings, so it is still financially worthwhile.

Benefits that can be included in salary sacrifice arrangements include the following;

Childcare Vouchers

Childcare Vouchers are a popular benefit. They’ve been around since 1997 and help over half a million working parents save money on childcare costs

Savings are made as they are non-taxable and exempt from NI. The employee saves money as they only pay tax and NI on the remainder of their salary. Employees can choose to sacrifice up to £243 per month (£55 per week) from their wages in exchange for the vouchers. This creates a maximum saving of £933 per year (for basic rate taxpayers) on the cost of childcare for each working parent.

The rules changed in 2017 when Childcare Vouchers were introduced to encompass older children into the scheme. Many working parents will be financially better off on Childcare Vouchers. It’s important to ask your employees to consider their options to enable your business to continue to make National Insurance savings.

Companies wanting to offer a Childcare Voucher scheme should opt for a provider that is a member of the Childcare Voucher Providers Association, which has a Code of Practice covering areas such as security of voucher funds, integrity of data management, handling complaints and service levels.

One important thing to note is that if you choose to offer a Childcare Voucher scheme, you can’t limit it to certain employees. HMRC rules state that it must be available to your employees “generally”.

Cycle to work

This is a little known salary sacrifice scheme which can save employees hundreds of pounds on retail prices for bikes, as well as creating tax savings.

The bike and safety equipment is paid for under a hire agreement via a salary sacrifice arrangement, usually over a 12 or 18-month period. After the agreed period, ownership is transferred to the employee.

Having a cycle to work scheme can also send a positive message about your company’s attitude to employees, reduce the need for parking spaces and save employees the cost of fuel and vehicle maintenance or ever-increasing rail fares. Cycling to work also maintains fitness and has been shown to reduce sickness absence.

There will be a saving for the company up to 13.8% on employers’ National Insurance contributions for each employee on the scheme.

Mobile phones

Another salary sacrifice scheme which is growing in popularity is used to pay for a mobile phone for the employee’s personal use. Under the scheme, a handset may be provided and employees make tax and National Insurance savings on their bill.

The employee can choose a handset and tariff to suit their needs. The employer can save up to 13.8% of NI contributions on the employee’s monthly deduction. For more information contact Nicola Roby at CHW Small Business Accountants in Bolton on 01204 534031 or via our contact us page.

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