A salary sacrifice arrangement is an agreement between employer and employee to reduce the level of upfront remuneration, usually in return for a benefit other than cash, such as childcare or improved employer pension contributions. This is known as a “Benefit in Kind” (BIK). Employers are able to initiate a salary sacrifice arrangement by agreeing to a change to the employment contract between them and the employee.
What are the Benefits to Employees of Salary Sacrifice Agreements?
By agreeing to implement a salary sacrifice agreement, the employee will pay lower amounts of both income tax and national insurance (NI) contributions as they are being paid less in cash. The extra money that they are gaining in terms of their pension pot or other BIK is tax-free, meaning that they are gaining financially from the situation. This means that their pension contributions are increased with none of the cost falling on them.
Why Should Employers Offer Salary Sacrifice?
As well as boosting the pension pots of their employees, employers can also benefit from offering salary sacrifice arrangements. The employer will be able to save around 13.8% of the salary that has been sacrificed by paying lower employer NI Contributions.
There may be a set-up cost for administering a salary sacrifice scheme, and not all employees will be suitable for it. Salary sacrifice is notably not nearly as good a deal for those in the lower salary bracket, closer to the minimum wage. Employees in this bracket may not be suitable to the idea of removing money from their take-home pay, and this should be taken into account when planning the scheme.
Implementing salary sacrifice agreements is a great way to save some money. Still, it must be done in conjunction with employees who can see the benefit that it can bring to them.
What Are the New Rules for Benefits in Kind?
New rules have been introduced where benefits in kind have been offered through salary sacrifice or optional remuneration arrangements, such that an income tax and national insurance contributions charge will arise on the higher salary sacrifice (or cash option) and the value of the benefit in kind taken. By taking the Benefit in Kind, the only saving made will be in employee national insurance contributions.
These rules cover all benefits in kind apart from employer pension contributions, childcare provided in workplace nurseries and employer-supported childcare, which is usually done via the issuing of vouchers. Cycle-to-work schemes; and ultra-low emission cars are also exempt from the rule changes.
This is a way of tightening up the taxation system to ensure that the benefits in kind that remain eligible for salary sacrifice are those that benefit an employee. Many other benefits in kind are now subject to taxation as if they were paid as a cash payment without salary sacrifice.
Here at Lawrence Grant, we can expertly navigate this complex arrangement with ease, and provide you with all of the ins and outs for you. Whether you're an employee or employer looking to take advantage of this offering, please reach out today for assistance.
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