Anne Average, who is married with one child, earns £25,000 a year - just over the UK average wage of £22,000. This is OK, but she wants to make her net pay of £18,725.60 go further. She is one of the 10 million UK employees who has decided to take advantage of salary sacrifice (SS). The theory is appealing. The more she swaps salary for a benefit, the more it triggers a decline in her income tax and National Insurance Contributions (NIC). It appeals to her employer too, as its NIC payments fall also.
In fact, salary sacrifice has been one of the Government's success stories, since it was first introduced for pensions more than a decade ago. Ms Average does pretty well even if she just uses SS for her pension. Assuming a 5% contribution, her net pay goes down by less (£1,112.50) than the value of the money sacrificed (£1,250,00) because she pays less in NIC. According to employee benefits company You at Work, people like Ms Average are saving a combined £1 billion in tax and NIC every year, and each employee overall could save themselves £1,129 a year, equivalent to 5% of the average UK salary. As with any seemingly 'money for nothing' scheme, the temptation though is to 'buy' more and more benefits through SS. And, thanks to a growth in the suppliers getting into this market, there is now a basket of at least eight tax-efficient benefits on offer - childcare vouchers, mobile phone contract, gym membership, car insurance, bikes for commuting, home insurance, wine and breakdown cover.
If Ms Average adds childcare vouchers to her pension the SS benefit gets even better. The 'value' of both benefits combined is £4,166 but her net salary only goes down by £3,124.54. Ms Average is more than £1,000 up. Add again a £400 Cycle 2 Work bike and she only loses £276 in overall salary - another plus. Add to this a bus pass, and the cumulative effect seems to get better still. In total some £5,166 worth of salary has been 'sacrificed' - equal to the value that these benefits would cost - but net pay has only gone down by £3,814.54. In essence, Ms Average is £1,351.46 'better off'. You at Work estimates there still are 30 million workers not using SS, missing out on tax savings of up to £12 billion per year…
There are some complex issues and potential pitfalls relating to salary sacrifice. Yet when sensibly applied it can offer an appealing win-win scenario for employer and employee alike.
MOST POPULAR SALARY SACRIFICE SCHEMES
With childcare voucher schemes employees can salary sacrifice up to £243 per month for childcare free of tax and NI contributions. A basic rate taxpayer taking the full allowance of £2,916 will save £962 per year and a high rate taxpayer will save £1,195 per year. This allowance can be claimed by both parents and is not dependent on the number of children.
Cycle 2 Work schemes allow employers to buy bikes and lease them to staff, free of tax/NI contributions. A £1,000 maximum limit is imposed on the value of the bicycle. Average spend is typically £350 per employee. Based on this value, a basic rate taxpayer would save £115 and a high rate taxpayer would save £143.
Mobile phone schemes allow employers to offer one mobile phone per employee for personal use through salary sacrifice free from tax and NIC. On a typical monthly mobile phone package of £35, a basic rate taxpayer would save £11.55 (£138 per annum) a month and a higher-rate tax payer would save £14.35 per month (£172 per annum).
Last year saw a number of employers introduce salary-sacrifice schemes relating to staff canteens. Packaged foods group Nestle was in the vanguard with its Eat at Work scheme, developed by employee benefits provider You at Work, whereby staff could swap a sum from their gross salary in return for credits. These credits were loaded on to a plastic card to be used to buy food and drink in the work canteen.
For a basic-rate taxpayer typically spending £5 a day on meals, snacks and drinks at work, this could have meant savings of £429 a year, while a higher-rate taxpayer could save as much as £533. Nestle was also in a position to make savings on the NICs it would have had to pay on that chunk of its employees' salaries before they were given up.
Author: Robert Gray
Publisher: Human Resources
Date: 1 April 2008