Archive: Mar 2013
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Author: Colin Spencer, Associate Director
A salary sacrifice scheme requires an employee giving up part of their salary in return for a benefit paid by the employer. Schemes recognised by HMRC include employer contributions to a pensions scheme, bicycles provided through a cycle to work scheme and childcare vouchers.
These schemes have been around for a long time but they are now beginning to become much more popular with all companies being required to meet the pension auto enrolment obligations by April 2017 at the latest. They are also being used to reduce salaries to avoid higher tax rates and maintain child benefit payments.
The main advantage of the scheme is that an employee will benefit from reduced income tax and national insurance as the revised salary is lower. The company will also have a reduced national insurance payment.
As an example, this is the effect on an employee on a £25,000 salary, currently paying £2,400 a year into their pension fund, before and after salary sacrifice:
- Salary £25,000
- Tax £3,112
- NI £2,069
- Pension £2,400 £7,581
- Net take home pay £17,419
- Salary £25,000
- Less sacrifice £2,400
- Revised salary £22,600
- Tax £2,632
- NI £1,781 £4,413
- Net take home pay £18,187
- Additional Take Home Pay £768
In this example the employer would save £331 in employer’s national insurance contributions.
The main downside to the scheme is that although the employee retains their original reference salary, there is a change to the contract of employment and there is a reduced salary which will affect levels life cover, mortgage borrowing, SMP and SSP.
When implementing a salary sacrifice scheme, it is very important that employers explain in detail the advantages and disadvantages and ensure that individual circumstances of employees are taken into consideration. As this represents a change in the original contract of employment, care needs to taken to ensure that the changes are agreed in writing by the employee.
Note that following the Budget, childcare voucher schemes Net take home pay are set to change at the end of next year, after the Government announced proposals to help more working parents meet the cost of childcare.
The new funding system will replace the current salary sacrifice scheme that is used by around 500,000 working parents and will see employees pay 80% of their childcare costs (up to £6,000 per child) and the Government subsidise the remaining 20%.
Under the new funding scheme, parents will be able to choose their own voucher provider, as it will not be a salary sacrifice scheme operated through their employer.