Many employers and their employees are considering swapping some of their salary for either tax-free benefits or benefits that have a low tax and NIC charge (for example an electric company car).
All this needs to be done with care and requires a change to the Contract of Employment. Furthermore, a salary sacrifice arrangement must not reduce an employee’s cash earnings below the National Minimum Wage.
From 6 April 2017, where a benefit is given under a salary sacrifice arrangement, the value of the benefit treated as earnings is the greater of:
- Salary/cash given up by the employee in return for the benefit; or
- The benefit is treated as earnings from the employment under the normal rules, ignoring any amount paid by the employee (known as the cash equivalent).
The exceptions to this rule are: –
- Employer pension contributions (and employer-provided pension advice);
- Employer-supported childcare and provision of workplace nurseries;
- Cycles and cyclist’s safety equipment; and
- Ultra – Low (< 75g) CO2 emission cars.
Many employers have started offering zero or low-emission cars as an alternative to salary. The normal optional remuneration arrangement rules do not apply to cars with CO2 emissions of 75 grams per kilometre (km) or less; these are simply taxed on the cash equivalent.
Salary sacrifice can be particularly tax effective when total income causes an employee to lose all (or some) of their tax-free Personal Allowance thus saving income tax at an effective rate of 60% in addition to NIC savings for employers and employees.
Example 1
An employee with a salary of £110,000 is provided with the use of an electric car for private use under a salary sacrifice arrangement. They give up salary of £600 (gross) per month (£7,200 per year). The car has zero CO2 emissions, a list price of £40,000, and a cash equivalent value of £800 (£40,000 x 2%).
The employee saves Income Tax of £3,840 (£6,400 @ 60%) plus NIC savings for both the employee and employer.
Example 2
An employee with a salary of £100,000 per annum is due a bonus of £20,000. They agree with their employer to forego the bonus in lieu of a £20,000 employer pension contribution. Income Tax of £12,000 is saved (£20,000 @ 60%) plus NIC of £400 (employee) and £2760 for the employer.
If you would like to discuss how tax and NIC can be saved via a salary sacrifice arrangement, please call us on 01223 810100.
