There are a range of tax and employment laws which affect employee benefit provision in the UK. Employee benefits legislation covers all benefits from pensions, company cars and share schemes to transfer of undertakings (TUPE) and the minimum wage. Benefits tax plays a key role in shaping which benefits are offered because some benefits attract less income tax and/or employees national insurance and/or employers national insurance than the equivalent cash amount would. See definitions or click on the links below.
Salary sacrifice refers to an employee agreeing to give up the right to receive a portion of their salary. This is used to provide a benefit, which is typically free of tax and National Insurance (NI) for employees. Employers can also save up to 12.8% on NI.
Such arrangements on benefits are commonly seen in voluntary benefit packages today, and some popular schemes include childcare vouchers, bike loans, mobile phones and car parking.
However the list of salary sacrifice benefits extends to health screening, work-related training, travel to work, and meals or food vouchers.
If structured correctly, contributions to a defined contribution pension scheme can also be offered through salary sacrifice arrangements within a voluntary benefits scheme in order to gain tax and NI advantages.
On 8 August 2008 HMRC published a ‘Frequently Asked Questions’ document on salary sacrifice.
Tax efficient benefits
Tax-efficient benefits are benefits on which there are income tax, employee national Insurance and/or employer National Insurance breaks (i.e. they are partly or totally tax or NI free).
In the UK these benefits include: childcare vouchers, bicycle loans, mobile phones, employer pension contributions, and health screening.
The tax breaks vary according to the type of benefit and apply when the employer pays for the benefits. Some employers allow staff to give up a portion of salary in exchange for the employer buying a tax efficient benefit on the employee’s behalf. This is known as ‘salary sacrifice’.