Salary sacrifice and tax-efficient benefits pay off for both employers and employees by cutting tax and national insurance bills, says Jenny Keefe
Tax offices are rarely viewed in a positive light. But thanks to a raft of tax breaks and salary sacrifice initiatives, thousands of employers across the UK are slashing their tax and national insurance (NI) bills – with the taxman’s blessing. Salary sacrifice arrangements, for example, allow staff to swap some of their pre-tax earnings for perks such as pension contributions and childcare vouchers. By paying for benefits out of their gross salary, employees reduce the tax they pay, and both employers and staff save on national insurance contributions (NICs).
Also, some benefits can be offered tax efficiently outside a salary sacrifice arrangement. These include employer-provided health screening and medical check-ups, long service awards, and on-site nurseries or workplace nursery partnerships.
Offering tax-efficient and salary sacrifice benefits is a good way of saving money in these belt-tightening times, says Joanne Powell, senior consultant at Xafinity Consulting. “It is important to make use of tax-efficient benefits, especially in the current financial climate where pay may be frozen,” she says. “Employers see this as a way of increasing an employee’s total reward package at no extra cost.”
Salary sacrifice first appeared in the late 1990s, but since then the range of benefits that can be offered in this way has widened.
Schemes limited to pensions and childcare vouchers are no longer the norm. Instead, employers are looking to offer tax-free mobile phones, tax-efficient bus travel and company cars offered via salary sacrifice.
Matt Waller, chief executive officer at Benefex, says: “There are the traditional staples in most benefit plans, which comprise childcare vouchers, cycle-to-work schemes and pensions. However, a number of the big four accountancies have become increasingly innovative in their approach to tax-efficient benefits, and have extended this to include gyms, meals at work, green transport and mobile phones.”
Other employers are also broadening their horizons. For example, rail franchise National Express East Coast runs a tax-efficient NCP car parking scheme for its employees.
But a successful reward package requires employers to create a benefits strategy rather than simply offering a collection of perks, so employers should consider how they can use tax-efficient and salary sacrifice benefits as part of a wider reward strategy.
The first step is to decide how to offer such benefits. The simplest option is to set up single, standalone perks. A popular approach is to begin with childcare vouchers and bicycles, then gradually add more schemes.
Tax-efficient and salary sacrifice perks can also sit together within a larger scheme, for example, as part of a flexible or voluntary benefits plan. “When you bundle schemes together, especially through flex, benefits can be better communicated and understood,” says Powell. “Once you have dealt with the administration for one salary sacrifice benefit, you can quite easily include others. Another obvious benefit is that flex administration software can be used, so all benefit selections can be made efficiently.”
Whichever style employers choose, they will have to decide where to direct the savings. For many employers, these can be considerable – up to 12.8% of salary in NICs. And when it comes to pensions, the savings can really add up. Scottish Life calculates that an organisation with 50 employees, each earning an average of £20,000 and contributing 5% to their pension, would save £6,400 a year on NICs.
If employees’ pension contributions total more than £500,000 a year, employers could cover the set-up costs of implementing pensions salary sacrifice within a year, according to figures from Watson Wyatt.
When it comes to spending these savings, organisations often pump the extra pounds back into benefits. The Employee Benefits/`Towers Perrin Flexible Benefits Research 2009 found that 43% of employers use the cash to fund flex schemes, a further 22% use it to save money for the business, and 18% share the spoils with employees.
Gareth Ashley-Jones, head of flexible benefits at Aon Consulting, says: “Generally, employers invest the bulk of savings made on tax and NI-free benefits back into reward, for example by putting in a flex plan, or adding extra perks to an existing scheme.”
But there is nothing like a recession to focus employers’ minds on cost-saving measures. “Undoubtedly, as the economic climate worsens, it may well be we will start to see more employers using the NI savings they make to improve their bottom line,” says Ashley-Jones. “Certainly, with pensions salary sacrifice arrangements, there can be substantial employer savings.”
Tim Harris, a consultant at Watson Wyatt, agrees. “In the past, many employers introduced pensions salary sacrifice at the same time as flexible benefits to offset the cost of introducing flex,” he says. “These days, many employers implement pensions salary sacrifice on a standalone basis to generate a cost saving for the bottom line.”
However, some employers still opt to share savings with their workers. Helphire, which supplies rental cars to people involved in road accidents, splits its NIC savings between staff and the business. Sean Morris, group HR compensation and benefits manager, says: “This way, the employee still gains financially. But the company has a contribution towards the development, maintenance and administration of these benefits. Our pension scheme, for example, is now run on a fully cost-neutral basis.”
But employers must ensure schemes fit with their brand values. “Employers are now using more intelligent strategies for introducing salary sacrifice benefits,” says Harris. “Providing benefits should not just be about bombarding employees with a long list to choose from. Promoting concepts such as healthy living, planning for retirement and green issues can be used to structure benefits so they are meaningful to employees.”
Offering the right tax-efficient perks can also help to attract the best staff and improve customer perceptions. “Corporate social responsibility [CSR], for example, is normally high on the agenda for most employers, and benefits such as cycle-to-work schemes and tax-efficient bus travel usually complement CSR initiatives,” says Harris.
But if tax-efficient and salary sacrifice perks do not fit in with corporate values, employers can run into problems, he adds. “Where an organisation is thinking of introducing car parking via salary sacrifice, the CSR department may be against it. However, if car journeys are unavoidable for certain staff, and the savings are ploughed back into green initiatives, such as shower blocks or bike racks, then the scheme could support CSR.”
Organisations also need to make sure that perks hit the spot with different groups of employees. “HR teams should seek to understand the demographic structure of their workforce, and how that may drive goals and rewards,” says Xafinity’s Powell. “They should devise a mix of salary sacrifice benefits that motivate and engage all the workers.”
But employers cannot be complacent.
Launching a scheme is one thing, getting employees to sign up is another. “The term salary sacrifice is enough to frighten people off,” says Helphire’s Morris. “For this reason, look to communicate these benefits in a very simple, straightforward way.”
The key to getting employees on board is clever communication. As with all benefits, case studies and examples of the savings that are available can help to press the point home.
Julia Turney, proposition development manager at Jelf Employee Benefits, says: “Salary sacrifice isn’t hard to set up, but solid advice, not to mention an efficient checklist, is extremely important. The whole process needs to be communicated clearly, showing why salary sacrifice is beneficial and who is eligible.”
Case study: ARM Holdings
Since microchip designer ARM Holdings launched a salary sacrifice arrangement around pension contributions last year, it has passed the lion’s share of its savings on national insurance contributions (NICs) back to its employees.
The firm ploughs 10% of its 12.8% NIC savings back into workers’ pensions. Elizabeth Crutchley, European reward adviser, explains: “ARM is committed to helping workers save for retirement, and the salary sacrifice initiative helps to boost pensions further.”
The firm, which has 638 staff in the UK, also offers a host of other salary sacrifice perks, including payroll giving and bikes for work.
“ARM has implemented a number of government tax-saving initiatives for employees in order to maximise the potential NI and tax savings that can be made,” says Crutchley.
The schemes fit in with the firm’s values, she adds. “In line with ARM’s family-friendly policies, childcare vouchers were launched through salary sacrifice in 2004.” A crucial aspect of offering tax-efficient perks is communication.
“Transparency is key,” says Crutchley. “Through effective communication, ARM is able to increase employee understanding and appreciation of the salary sacrifice benefits on offer.”
Some of the top tax-efficient perks:
Allow staff to cut the cost of pensions by removing contributions from the NI net. Workers can also save on income tax.
Employees can swap part of their salary for childcare vouchers worth £243 a month, which can save as much as £962 a year for a basic-rate taxpayer.
The government’s cycle-to-work scheme typically knocks nearly 50% off the overall cost of a new bike for employees.
Can be offered as a standalone perk or via salary sacrifice. There is no charge to tax on one mobile phone provided to an employee or on any line rental or the cost of private calls for the phone paid for by an employer.
An initiative which allows workers to save up to 41% on bus passes.
Staff can exchange part of their gross salary for credits loaded onto a plastic card, which can be spent on staff canteen food.
It is possible to pay for staff training through salary sacrifice, but only if the course is linked to the employee’s job role. Such training is tax-efficient even if not funded through salary sacrifice.
After years of to-ing and fro-ing, HM Revenue & Customs confirmed employer-provided health screening and medical check-ups are exempt from tax and NI from 6 April 2009.
Spaces at or near an employee’s place of work are not a taxable benefit.
Employees’ charitable donations are currently tax, but not NI, free But if staff give via salary sacrifice, they do not pay tax or NICs on the amount.
Tax-free up to the value of £50 for each year of service.
Pensions tax changes:
Higher-rate tax relief on pension contributions for staff earning £150,000 or more a year will be restricted from April 2011 under changes announced in this year’s Budget. This relief will gradually taper down to 20% for those earning more than £180,000. Until the changes come into force, anti-forestalling measures have been put into place under which those affected can continue to receive tax relief at their marginal rate, provided they either continue their normal pattern of contributions or their contributions total no more than £20,000 a year.