With the increases in National Insurance Contributions (NICs) from 6 April 2022 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 such as an electric company car.
However this needs to be carried out with care as it requires a change to the Contract of Employment and the salary sacrifice arrangement in place 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 the 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 5 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 £1100,00 is provided with the use of an electric car for private use under a salary sacrifice arrangement. They give up the equivalent of £600 (gross) in their salary per month (£7,200 per year). The car has zero CO2 emissions a list price of £40 and a cash equivalent value of £800 (£40,000 x 2%).
The employee saves Income Tax of £3840 (£6400 @ 60%) plus National Insurance Contributions 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. This results in a saving of £12,000 in Income Tax (£20,000 @ 60%) and a saving of £650 for the employee in National Insurance Contributions and £3010 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.
