Salary sacrifice: making your benefits budget go further

Salary sacrifice is a fantastic way to stretch employee benefit budgets. It helps employees and organisation save money on their tax bill and it’s government approved. If you’ve not made the most of this brilliant cost-saving approach, here’s how to introduce salary sacrifice arrangements to your business and get more bang for your benefits buck.

STEP 1 – IDENTIFY WHICH BENEFITS CAN BE ARRANGED VIA SALARY SACRIFICE

The list of employee benefits that you can offer via salary sacrifice has reduced in recent years. However, there’s still an opportunity to save money using this HMRC-approved tax tactic for the following benefits:

• Cycle to work schemes
• Ultra-low emission vehicles including company cars
• Pension contributions and advice

If you’re providing any of these benefits but you’re not using a salary sacrifice arrangement to do so – or you want to introduce a new car or bike benefit – it makes sense to do this using salary sacrifice.

STEP 2 – UNDERSTAND THE RULES

The tax your organisation and employees can save on bike for work is calculated like this:

1. An employee takes up a £1,000 cycle to work voucher
2. A basic rate taxpayer would normally pay 20% in tax and 10% in national insurance contributions (NIC) – 30% or £300 – on this amount. A higher rate taxpayer would pay 40% in tax plus 2% NIC – that’s 42% or £420 in tax over the course of a year.
3. With a salary sacrifice arrangement, the £1,000 is used to pay for a cycle to work voucher and it is no longer taxable. This means that instead of paying £320 or £420 in tax, the individuals save these amounts on their tax bills.
4. The organisation also benefits because there is no employer NIC to pay on the amount that has been sacrificed. This saves 13.8% or £138 on the total amount of salary sacrificed. For example, if 20 people take up the full £1,000 for cycle to work, that’s a saving of £2,760 over the year.

Pensions work slightly differently with an option for employees to put the tax savings into their pension pot rather than take it as additional pay. However, the employer NIC savings of 13.8% remain the same.

For cars, the best way to save the most tax is to introduce ultra low emission vehicles (ULEVs). The tax bands work on the basis that the less CO2 a car emits, the less tax the organisation and the employee will need to pay.

These savings are even more pronounced from April 2020 onwards when cars that use electricity only, and therefore produce no emissions, will not attract any benefit-in-kind tax payments for employees and organisations.

We have two articles which provide full details on how to calculate car BIK-tax and the impact of the new BIK-tax rates from April 2020 onwards.

STEP 3 – IDENTIFY POTENTIAL COSTS AND SAVINGS

Should you decide to offer a new employee benefit or introduce salary sacrifice, you’ll need to work out the cost-saving benefit for your business case. You can do this by:

1. Predicting uptake – use a survey to find out whether introducing salary sacrifice will increase existing uptake or to predict how many people would take up a new benefit if introduced. Then multiply the relevant percentage by your headcount.
2. Calculating the employer NIC savings – factor your likely take up by the number of people who are basic and higher rate taxpayers. Run best, middle of the road and worst-case scenarios to create a range of potential NIC savings.
3. Identifying your cost to implement – how long will it take to set up your new benefit or introduce and administer salary sacrifice? Is there any cost to set up the scheme?
4. Seeking benefit providers who offer protections – mitigate any risks to the organisation by working with a leading provider who can protect your organisation’s interests.

With your figures at the ready, you’re all set to make your business case. Don’t forget to include non-monetary factors like reducing your organisation’s carbon footprint, offering employees new benefits to drive engagement and retention and ensuring your total reward package is market competitive.

STEP 4 – SET UP LIFESTYLE EVENTS FOR EACH BENEFIT

Once you get the go ahead, you need to establish lifestyle events. HMRC rules stipulate that when an employee enters into a salary sacrifice arrangement, they’ve agreed to exchange a fixed amount of salary for one year. At the end of the year, the amount can be changed or the arrangement comes to an end.

These are situations in which an employee is allowed to make a change to their salary sacrifice arrangement during the benefit year. These are known as lifestyle events and they include situations like the death of a spouse or divorce – issues that will impact the employee financially.

In these scenarios the individual can change their contribution. HMRC has more details on lifestyle events here.

STEP 5 – LET HMRC AND YOUR STAFF KNOW WHAT YOU’RE DOING

When introducing a salary sacrifice benefit for the first time, you need to let HMRC know your plans before you launch.

It’s also important to communicate your new benefit to create excitement and to ensure people understand how salary sacrifice works. Staff need to be confident about the workings of salary sacrifice to enter into an agreement. Without sufficient information, they might not be prepared to take up a new benefit.

Salary sacrifice is a great way to squeeze more money from your employee benefits budget. Whether you want to introduce a brand new benefit to employees, or help your staff and your organisation make the most of tax breaks, salary sacrifice is the way forward.