Employees are taxed (and NI’d) on salary and benefits that we provide (BUPA, phones etc). We also pay an employer’s national insurance payment as a percentage of salary. There are some benefits that can be provided for employees that are not taxable (pensions, car parking for work, child care vouchers). At the present time we provide no benefits in addition to salary, the employer contributions of pension being in abeyance.
Most pension contributions paid by employees no longer get basic rate tax relief. Only those who are on higher rate tax get relief on pension payments, but at basic rate. This is particularly important as changes in pension arrangements for the future will make the availability of pensions to staff compulsory as well as employer contributions to those pensions.
If we were to alter our contracts and contract to pay these payments on behalf of staff, with a consequent reduction in salary, staff gain a tax and NI advantage, we gain a NI advantage.
An employee earns 25000 salary on which they pay tax and NI based on that salary. We pay an employer’s NI contribution based on 25000. From the taxed income they pay 750 pension and 250 parking. If we contract to pay both, and they make a salary sacrifice, then they only pay tax and NI on 24000, we pay NI only on 24000. The pension and parking expenses are paid by us. We are no worse off, in fact we are better off because the Employers’ NI payment is lower.
The employment contract needs to be adjusted to reflect this change. As part of that change the employee needs to be given the right at any time to opt back in to the previous salary and not be paid the benefits.
There are some potential disadvantages:
The revised salary is used to calculate a number of different things:
- Pay rises (but we can make provision for that)
- Redundancy payments (but not if the gross salary is more than £22,360)
- Mortgage references (but this can be explained)
- Some state benefits (child tax credit and working tax credit) if staff earn under a certain limit after the sacrifice has been made
The lower figure after the salary sacrifice has been made can have an affect of reducing these payments.
A member of staff wanting to take advantage of salary sacrifice scheme will need an amendment to their contract of employment. The amendment needs to take account of the change in the employment contract. It also need to include the rightfully employee to revert back to the form of contract at any stage should they wished. These are fairly straightforward amendments to make, but need to be done carefully.
We will work with your pensions adviser and your accountant to ensure that we fully understand your requirements and then to provide you with the necessary documentation to implement those requirements.
For further information, contact firstname.lastname@example.org.