A wide variety of perks can be offered via salary sacrifice, and if HMRC’s rules are met, tax and national insurance gains can be substantial, says Tom Washington
Christmas is just around the corner and it is never easy to choose the perfect gift for loved ones without going over budget. Selecting perks to offer staff is a similar task, but by using salary sacrifice arrangements, employers can offer valuable benefits without breaking the bank.
Under tax-efficient benefits offered via salary sacrifice, an employee gives up a portion of their salary to be used to provide a benefit, which is typically free of tax and national insurance (NI) payments. Employers can also save up to 12.8% on NI.
Schemes must be approved
Such arrangements can be included in voluntary and flexible benefits packages, or offered as standalone schemes. But any salary sacrifice scheme must be approved by HM Revenue and Customs (HMRC), or an employer could end up being liable for unexpected NI contributions.
Perks such as cycle-to-work schemes and pension contributions are staples of most benefit plans, and such is the attractiveness of potential savings for employers and staff, salary sacrifice has become a breeding ground for a wide range of qualifying schemes.
A recent addition to the perks on offer is salary sacrifice around company cars. Mark Carman, marketing and communications director at Motivano, says: “The tax breaks available for vehicles with low emissions, as well as the substantial discounts available for organisations making fleet purchases, make buying these types of company car through salary sacrifice an attractive proposition – for both the employer and the environment.”
In May this year, accountancy firm Deloitte introduced such a scheme for its 12,000 staff, enabling them to sacrifice a proportion of their salary and use it to take a petrol car with carbon dioxide emissions of 120g per km or below and pay tax on just 10% of the list price. This can lead to savings of up to 45% on the cost of providing the benefit.
Another scheme to emerge in recent years is the cashless canteen, which is offered by organisations such as Cancer Research UK and T-Mobile. Staff can swap a portion of their gross salary for credits that are loaded onto a plastic card and can spent on food and drink in a workplace canteen.
However, a lack of full backing by the government could make the popularity of such schemes short-lived. HMRC has challenged a number of schemes because it believes the employee gives up a token or credit for the meal which has a cash value and should therefore be taxed.
As the government’s proposals to remove tax and NI breaks from childcare vouchers beginning in 2011 show, it is clear salary sacrifice schemes are not immune to changes from the top. Alastair Kendrick, director at consultancy Mazars, says HMRC is looking at such schemes very closely. “There are still those who are arguing with HMRC on cashless canteens and it will be interesting to see if they succeed,” he says.
The government has been far more proactive in backing schemes that support its green agenda. Employers such as Nottingham City Council and Royal Bank of Scotland have launched schemes that allow staff to sacrifice salary in exchange for an annual bus pass, with payments spread over the year. This currently applies only to bus travel, but some organisations have been looking to integrate trams into their scheme.†
Richard Davies, head of employee benefits at P&MM, says such schemes have proved particularly popular with public sector organisations, such as NHS trusts, which have a high number of staff who travel to and from work by bus, and often have a bus stop within their sites. Other lifestyle perks that can be offered via salary sacrifice include holiday trading.†
For example, P&MM’s Holiday Plus scheme enables staff to spread the cost of any additional holiday they would like to buy over a 12-month period. Employees get to enjoy more time off work at a reduced cost, and the employer benefits from a lower wage bill.
Tax-efficient car parking at, or near, an employee’s place of work can also be offered through a salary sacrifice arrangement. Despite concerns this tax break may be withdrawn, providers believe it is a safe option because the government would struggle to apply a uniform taxation system across all types of staff car parking.
Employers can also use salary sacrifice to support work-related training. To qualify for the tax exemption, training must be linked to an employee’s role within the organisation. In addition, a sacrifice salary scheme can be used to allow staff to subscribe to a qualifying professional body, where no tax is due if this is paid for by the employer.
Growing awareness about health and wellbeing has increased interest in health screening as a benefit, and this is an attractive salary sacrifice option, particularly for higher-paid employees. Staff save on tax and NI on the cost of the assessment (about £500), which is usually spread over 12 months. Some employers that pay for senior staff to have health screening offer them the chance to pay for their spouses through salary sacrifice, so saving up to 41%.
Group income protection
Offering group income protection (GIP) via salary sacrifice also enables employers to pass some of the cost associated with long-term absence on to staff. Caroline Jordan, head of voluntary GIP at Personal Group, says: “Employees can get the same level of cover and, in some instances, can be covered for pre-existing conditions. This helps employers deliver valuable benefits without the longterm financial commitment that comes with many core benefits.”
Employers can also provide a salary sacrifice scheme that allows staff to donate money to charity tax efficiently. For such schemes to qualify, however, the cause must be chosen by the employer and contributions must be made as a corporate donation because the employee has to effectively ‘give up’ control of the money sacrificed in order to qualify for the tax exemption.
But Jon Bryant, business development director at JLT Online Benefits, says that despite the potential savings available by offering tax-efficient benefits via salary sacrifice, employers must ensure they have good reason to implement them, particularly perks that have a niche interest. “We have a few clients with mobile phones and car parking schemes, but my view is this is scraping the barrel,” he says. “Employers need to research what the take-up and engagement levels of the benefit will be. If it is not going to be that high, what is the point in spending time and money putting it in?”
Another consideration for employers is the changes to the Sex Discrimination Act that came into effect in October last year, and mean they must make non-cash contractual benefits, such as childcare vouchers, available to staff throughout statutory maternity leave.
HMRC says this entitlement will continue even though an employee may not be receiving any salary that can be sacrificed. Statutory maternity pay cannot be sacrificed.
“Prior to October 2008, there was a huge push to create new weird and wonderful salary-sacrifice benefits such as for staff uniforms,” says Bryant. “But the changes in legislation have meant an increased cost base of these schemes for employers.”
So while providers may continue to come up with new salary sacrifice perks, employers must choose what to offer carefully
CASE STUDY: General Healthcare Group
General Healthcare Group has launched a workplace payrollgiving scheme to allow its 10,000 staff to give to charity tax efficiently via a salary sacrifice arrangement. It is an option within its voluntary benefits package. Donating this way can increase contributions by up to 40%.
Employees make tax and national insurance savings on every donation because it is taken directly from their gross pay. Such schemes fit into corporate social responsibility programmes, which can help improve staff engagement.
Catherine Ward, HR director, says: “General Healthcare Group looks to have a positive influence on society. We believe people who choose to work in the field of medicine change lives for the better every day, and our employees do a great deal to support a range of charities and community programmes in the UK and abroad.”
Read more articles from Special report 2009: voluntary benefits