Childcare vouchers and bikes for work are standard benefits offered through salary sacrifice, but there are plenty more perks that deliver tax and NI savings, says Jamin Robertson
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For employers operating in a tight labour market, the thought of asking employees to take a pay cut might be considered by many as commercially catastrophic. But when a valued benefit is offered in return, all parties can be quids in.
The practice of operating benefits through salary sacrifice is certainly popular. According to the Employee Benefits/Halifax Voluntary Benefits Research 2005, 68% of employers stated that they offered at least one benefit to employees in this way.
And although the axed home computing initiative (HCI) dealt a blow to many benefits schemes funded by savings through salary sacrifice, consultants say there is still plenty of interest in the provision of tax-efficient benefits in this way.
By definition, salary sacrifice is simply a method whereby the employee gives up the right to receive part of their pay in return for the employer’s agreement to provide the employee with some form of non-cash benefit.
Where a benefit incurs a specific tax exemption, the employee can receive the benefit-in-kind free of tax and Class 1A National Insurance (NI) contributions, in place of salary on which tax and Class 1A NI would have been fully payable.
In addition, where specific tax exemptions exist, the employer can save Seconday Class 1 NI of up to 12.8% on the part of the employee’s gross salary that has been sacrificed.
There are a host of benefits that HM Revenue & Customs (HMRC) allows tax and NI concessions on. Some are commonly offered by employers and widely communicated by the government, including childcare vouchers and salary sacrifice on pension contributions. These benefits-in-kind attract the most generous tax treatment.
However, there are also other less well-known benefits, such as clothing for work and car parking charges, that employers can offer through salary sacrifice on which they can save NI and employees tax and NI.
In fact, in principle, many benefits can be offered through salary sacrifice, even those benefits that do not attract specific tax breaks. Concierge services, for example, are not eligible for tax relief, but employers are increasingly offering them through salary sacrifice alongside other benefits. The employer arranges the service on the employee’s behalf, taking administrative pressure away from staff.
Mark Duke, principal at the consultancy firm Towers Perrin, explains: "Most benefits offered via salary sacrifice will [give] employees and employers an NI saving, not just those openly advertised as doing so like the government’s childcare scheme."
But while some employers have moved to make all benefits within flexible benefits packages available through salary sacrifice, consultants say that overall, take up in respect of many of the tax-exempt benefits is not particularly high. It is believed that the elimination of the HCI scheme may be partly to blame.
Alistair Denton, managing director of Motivano, says employers are now focusing on perks that are seen to fit alongside government policy and are therefore likely to remain with generous tax breaks. Examples of such benefits include salary-sacrificed childcare vouchers, bikes for work and pension contributions.
"Where you have a sound match with government policy and the benefits can be salary sacrificed you’re going to get organisations interested," Denton explains.
These benefits typically appeal to a wide range of employees and therefore normally attract a reasonable level of take up. But Simon Parsons, product manager for payroll and legislation at human resources consultancy Ceridian, believes forward-thinking employers are becoming more aware of what else can be offered through a salary sacrifice scheme.
"Competition for quality labour is leading to an expansion in the benefits [employers] offer. This tends to be among employers of highly-paid, valuable individuals where competition is fiercest, for example, the financial services industry in the City of London," Towers Perrin’s Duke adds.
HMRC’s list of tax-exempt benefits currently includes several benefits that appear to support popular workplace strategies.
Many employers, for example, are currently interested in supporting employee wellbeing and may offer access to corporate sports facilities through salary sacrifice to further their aims.
Employers can also take money for employees’ meals provided on-site through salary sacrifice and staff are able to get tax breaks on this benefit.
Another perk that can be offered through salary sacrifice is health screening. Jon Bryant, head of flexible benefits at the employee benefits consultancy Jardine Lloyd Thompson, reports a high level of interest in this benefit among his clients.
Employers may also use the exemptions to further their green travel strategy. Organisations that operate a bus service to and from work for employees, for example, can offer this through salary sacrifice and therefore staff may qualify for tax exemptions.
In those organisations where it is more convenient to travel by car, employers can also offer employees the chance to salary sacrifice their car parking fees for car parks at or near the workplace. Gary Hull, director of HR services at PricewaterhouseCoopers, says this has become particularly popular within the NHS. "That’s where we find the biggest take up. They have to pay [for car parking], and to do that through salary sacrifice is far more effective," he says.
Donations made to charity are another area where employers and employees can both make the most of the salary sacrifice model. "[The employee] may arrange it so the employer makes the donation. The employee gets tax and NI relief on the amount, but the employer also gets corporation tax relief on the amount they contribute," explains Parson.
Work clothing is also tax-deductible and an offering that employers are increasingly taking on board.
Taken together, the examples given above reveal the scope employers have to extend salary sacrifice beyond the options typically given, such as childcare vouchers and bicycles.
However, employers considering widening the scope of their salary sacrifice offering or setting up a scheme for the first time, must ensure it is administered correctly. It is critical, for example, that employers ensure there is evidence of a contractual change to formally establish salary sacrifice.
Duke says that even when employers add just one salary sacrifice benefit, this will affect HR and payroll administration.
Pay slips will need to be altered, and the notion of pre-sacrifice salary introduced to protect existing pay-based entitlements. Pension scheme rules may need changing and employee benefit information must be updated.
"Some issues will have knock on administration effects. For example, deciding to exclude lower-paid employees because their salary sacrifices could take them below the National Minimum Wage (NMW) means that different records must be held for them, and new employees at those earnings levels must also be readily identified to ensure correct treatment," Duke adds.
Apart from making sure that salary sacrifice arrangements do not drag wages below the NMW, other potential pitfalls include the impact on maternity and paternity leave, as well as Working Tax Credits.
Because of the degree of administration required, Bryant says it is probably only worthwhile introducing new benefits where there is a clear demand.
"A lot of these benefits are specialised. You’ll find organisations will not want to go ahead and do something if there’s nothing in it for them and only something in it for one or two employees," he explains.
However, he adds that flex provides an ideal platform for benefits that are not expected to have a high level of take up. "If it is part of a wider employee benefits approach you can offset the cost of [a minor benefit] because you’re actually doing the same work [as when] setting up [say] a salary sacrifice arrangement for childcare vouchers," he says.
Employers are advised to take expert advice when setting up a salary sacrifice arrangement because schemes cannot be pre-approved by HMRC.
It would be a mistake to ignore the potential of salary sacrifice just because of the complexity of setting up a scheme.
With the right advice and a little care, it is possible to make significant savings for both the employer and employee, while delivering valued benefits.
Case study: British American Tobacco
British American Tobacco (BAT) operates its flexible benefits scheme, Free2, through salary sacrifice. While holiday trading is the most popular benefit on offer, with about 10% of participants buying extra days and another 10% choosing to sell entitlement, the perks package also includes a wine club and clothes for work.
The wine club is not a tax-exempt benefit but clothes for work do qualify for tax exemptions. Of the 1,382 participants in the flex scheme 23 employees purchase wine, selecting between one and three cases to be delivered to their homes every quarter. A further 23 employees also select clothes for work and sacrifice between £500 and £1,500 for their clothes annually.
Malcolm Douglas, remuneration and benefits manager for BAT, says that while the employer saves on national insurance (NI) payments through the flex scheme, these savings do not totally fund the scheme.
"The NI savings are a help, but they don’t offset the full cost. We’re doing it really to help build the employer brand," he says.
Unusual salary sacrifice perks
The following benefits are free of tax and National Insurance (NI) within limits for employees:
- On-site meal vouchers
- Subsidised meals on business premises
- Mobile phones
- Car parking fees for car parks at or near the workplace
- Travel between home and work
- Sporting or recreational facilities
- Work clothing
- Employee health screening
For more information visit www.hmrc.gov.uk/employers/tma-ebik.shtml
Common salary sacrifice perks
The following benefits attract tax and NI relief for employees and NI relief for the employer when provided through salary sacrifice and are commonly offered by employers:
- Childcare vouchers
- Bikes for work