Salary Sacrifice: A Way To Retain & Attract Employees

Salary sacrifice, also known as a salary exchange, is an agreement between a business and their employee to reduce their pre-tax annual salary, in return for receiving a non-cash benefit. The benefit can include things like pension contributions, childcare, and private healthcare, and employees can either opt into or out of the schemes as they choose. It is important to note that salary sacrifice schemes have to be offered to all employees, so one is not favoured over another.

How Does Salary Sacrifice Work?

You can’t just throw a benefit at your employees and hope they will accept it, this is something you need to take time over. To begin with, you will need to agree on the cash value of the benefits, so this equates to the same value as their loss of income. You also can’t reduce your employee’s cash earnings below the National Minimum Wage rate either, so make sure this is taken into account.

What Salary Sacrifice Schemes Are Available?

The most common salary sacrifice scheme is the Cycle To Work scheme, where the employee hires a bike for the period of the agreement. With so many scheme providers in the UK, a quick search on Google and you’ll be able to find one close to you. When the scheme comes to an end, the employee can either enter a new agreement to rehire the bike, buy the bike, or give the bike back.

Similar to the bike scheme, another salary sacrifice can be a car lease scheme, where employees can sacrifice a specific amount of their salary each month in exchange for a new lease car. The business doesn’t own the car in this instance, the employee borrows it from the lease company and it can therefore be returned at the end of the term.

Pension contributions are the most popular salary sacrifice schemes. Every employer must contribute a minimum of 3% to their employees’ pensions, with the option to contribute more. However, this can also be increased via a salary sacrifice pension scheme. This means that employer contributions increase, but actually, it is the employee’s contribution (since it is being taken out of their salary). It is worth bearing in mind that each individual can only contribute a total of £40,000 to their pension savings on an annual basis, so make sure contributions from a salary sacrifice scheme don’t push them over this limit.

Advantages of Salary Sacrifice

1. Employees can take advantage of the exemption from both income tax & National Insurance contributions on the sacrificed amount.
2. High-price items such as bikes and cars can become more affordable, allowing employees to spread the cost (paying in monthly installments).
3. The salary sacrifice schemes can help employers to attract new members of staff, and help retain those who are already employed.
4. Employers save on tax costs due to there being no employer National Insurance contribution on the sacrificed salary.

Disadvantages of Salary Sacrifice

A reduction in the overall salary of an employee could impact mortgage applications as their ‘take home’ pay is lower. It can also impact work-related statutory payments such as maternity or sick pay.

• With the car leasing scheme, employees will have to pay a Benefit In Kind tax at the end of the year.
• If any employee leaves during a lease term for a bike or car, the business has to pay the ongoing monthly payments.

Keep receipts

Any accountant will express the importance of keeping receipts for any business-related purchase. This is because expenses are a way of bringing your tax bill down, so having the receipts makes it easier to calculate the final amount. There are lots of different types of expenses that you can claim, which your accountant will be able to run through in further detail.

If you are self-employed with a turnover greater than £85,000, you will need to break down your expenses into different categories. HMRC may ask to see your receipts for these, so make sure you keep them safe throughout the year.

Take your time to submit your tax return

Filling out a tax return yourself is a time-consuming process that can go wrong quite quickly. Don’t rush your tax return as this is when mistakes often happen. Give yourself plenty of time to fill out your tax return, and check it over several times before hitting that final submit button. Check all the details are correct, and triple-check all your calculations too.

Make a note of how much you need to pay and when

Paying your tax bill isn’t just about making the payments at the deadlines we have listed above. Your bill may include more than one payment, for example you may need to submit a balancing payment (the amount of tax you owe for the previous year) as well as a payment on account. If your bill is over £1,000 you will be required to pay on account towards next year’s bill. The only time this doesn’t happen is when you have already paid 80% of your bill. See how confusing this can get?

Seek professional assistance

Even if you don’t have a complex tax return to complete, getting professional assistance is always a good idea. A qualified, experienced accountant will make sure you are not only following the law correctly, but also will be able to help maximise your credits and deductions, thus reducing your overall tax bill.

With common tax problems such as constantly changing tax rules, and incomplete documentation, it can be really hard to keep on top of your tax return while trying to run a successful business. With Wright Vigar on your team, we can provide a business & corporate tax planning service to help guide you through the minefield that is your tax return. Get in touch to find out more about how we can make the tax reason less stressful for you.