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Salary Sacrifice scheme

Are Salary Sacrifice schemes still worth it?

Catherine Chapman :: Thursday 1st September 2016 :: Latest Blog Posts


September 2016

A client and I have recently been discussing whether it is still worthwhile offering a Salary Sacrifice scheme. After the various discussions I have had, I thought it would be an interesting article for this month's edition of the Downsman.

Salary Sacrifice – still worthwhile? Read the article below!

Under a salary sacrifice arrangement the employee gives up part of his or her cash pay in return for a non-cash benefit. This can be very beneficial for both the employer and the employee.

However, the Government are unhappy about salary sacrifice arrangements. While they have yet to ban them, they are considering what to do with them and some of the newer exemptions do not apply where the benefit in question is provided by means of a salary sacrifice arrangement.

Making the most of an exemption

Salary sacrifice arrangements are frequently used to take advantage of the tax exemptions, such as that for childcare vouchers. The employee gives up taxable and NIC-able salary in return for childcare vouchers, which are exempt from both tax and National Insurance. The employer also saves employer National Insurance contributions.

Example

Holly is a basic rate taxpayer. She swaps salary of £55 per week for childcare vouchers. The childcare vouchers are exempt from tax and National Insurance. This saves her tax of £11 per week (£55 @ 20%) and National Insurance of £6.60 per week (£55 @ 12%) – a total savings of £17.60 a week, or £915.20 per year. Her employer also saves employer's National Insurance of £7.59 per week – an annual saving of £394.68.

Until 2017, employer Childcare Voucher schemes remain the best way for working parents to reduce the rising cost of childcare. Many parents will not be able to claim under the new Government scheme so perhaps should join an employer scheme before the Childcare Vouchers scheme closes to new entrants from April 2018. Parents can remain on the Childcare Vouchers scheme beyond 2018 and for as long as they require.

The government have proposed a Tax-Free Childcare (TFC) scheme to start from 2017. The new scheme will allow some working parents (where both parents are working or are single parents) to claim up to £2,000 per child towards the cost of childcare per year.

It has been proposed that for every 80p parents transfer to a dedicated online account and spend on regulated childcare, the Government will top this up with 20p, which is capped at up to £2,000 of savings per child per year. Parents will be able to use the vouchers with any Ofsted regulated childcare provider in England.

Those who are not eligible for the new scheme include any couples where one parent is not working and parents who claim for children older than 12 years old. The proposed scheme will only be open to some working parents (where both parents are working or single parents) and the parent is not already getting support through the existing Childcare Voucher scheme. To be eligible, parents must be earning less than £100,000 annually, working a minimum of 16 hours per week and not be receiving support through tax credits. Under the new proposals, parents will be able to sign up for employer supported Childcare Vouchers until April 2018 and they can then continue to order vouchers beyond 2018, making tax and National Insurance savings, for as long as their employer continues to run the scheme or until their child is 15 years old (or 16 years old if disabled), whichever is sooner.

Employee NIC savings

Salary sacrifice arrangements are also effective even if the benefit is not exempt. Most benefits in kind are liable to employer-only Class 1A National Insurance contributions rather than Class 1.

Contributions payable by both the employee and the employer. Swapping cash salary for a benefit in kind swaps the liability from Class 1 to Class 1A, saving employee contributions.

Example

Naomi is a basic rate taxpayer. She gives up £300 of her salary in return for private medical insurance, which costs her employer £300 a year. Although she is taxed on the benefit of the private medical insurance, she saves National Insurance of £36, which she would have paid on the £300 of salary. Although the employer does not save any money, there is a cash flow benefit as Class 1A National Insurance is not payable until after the year end.

Keeping it effective

To benefit from the advantages offered by salary sacrifice arrangements, the salary sacrifice must be effective. This means that the reduction in salary must be contractual. It should be noted that a salary sacrifice arrangement cannot reduce the employee's salary below the National Living Wage (or National Minimum Wage for employees under the age of 25). It may also impact on the employee's entitlement to contributory benefits.

Limited opportunity

Salary sacrifice arrangements are under the HMRC radar. Some tax exemptions, such as those for trivial benefits, qualifying paid and reimbursed expenses and workplace meals, do not apply where the benefit is provided under a salary sacrifice arrangement. Further restrictions are expected. The message is to take advantage of salary sacrifice arrangements while you can.

The evenings are now getting darker! It looks as though the summer has finally left us. Hopefully you will now be able to sit down and gather all your tax return/accounts information and give them to your accountant (or if you need a hand, please do not hesitate to give Catherine a call).

If you need assistance with any accountancy or tax related matters, please contact Catherine at CBA Services Limited on 01258 840306/07895 913546/Catherine@cba-services.co.uk

Whilst care has been taken in preparing this publication it is for information only. It is not, and should not be construed, as advice and accordingly no reliance should be placed on the information contained herein.

May 2016

By the time you will be reading this, the new tax year will be only a few days away, so hopefully you have considered the tax planning ideas I mention in my last article.

The Chancellor made his Budget 2016 Speech on 16 March and I thought I would outline a number of the topics which you can read about below.

Personal Tax

Personal Allowances for years ended
5th April 2017 £11,000
5th April 2018 £11,500

Stamp Duty Land Tax

Additional properties

From 1 April 2016 when purchasing a second home the stamp duty land tax will be increased by 3% above the normal rate.

Tax Rates for year ended 5th April 2017
£0 - £32,000 at 20%
£32,001 - £150,000 at 40%
£150,000+ at 45%

Tax Rates for year ended 5th April 2018
£0 - £33,500 at 20%
£33,501 - £150,000 at 40%
£150,000+ at 45%

Personal savings allowance

From 6 April 2016 basic rate (20%) taxpayers/higher rate (40%) taxpayers will not pay tax on the first £1,000/£500 of savings income. Additional rate (45%) taxpayers will not qualify for the allowance.

Automatic deduction of savings income tax

From April 2017 savings income tax will no longer be automatically deducted from income received from certain investments.

Taxation on dividends

From 6 April 2016, the way in which individuals are taxed on dividends from UK, and some non-UK companies, will change
The new rates will be:
£0 - £5,000 at 0%
£5,001 - £32,000 at 7.5%
(if the total income is within the basic rate band)
£32,001 - £150,000 at 32.5%
(if the total income is within the higher rate band)
£150,001 + at 38.1%

Capital Gains Tax

The tax rates for capital gains tax were reduced to:
Rates from 6 April 2016:
Higher rate 20%
Basic rate 10%

However for gains on residential property which is your second property will be:
Higher rate 28%
Basic rate 18%

Business Tax

National Insurance

The annual employment allowance for National Insurance Contributions will be increased to £3,000 from April 2016. Not available for single director companies.

From April 2018 Class 2 NIC will be abolished completely.

Corporation Tax Rate for years beginning
1 April 2017 19%
1 April 2018 19%
1 April 2019 19%
1 April 2020 17%

Apprenticeship levy

From April 2017 an apprenticeship levy will be set at a rate of 0.5% of an employer's pay bill. Each employer will receive an allowance of up to £15,000.

Trading income received in non-monetary form

Where trading receipts take the form of non-monetary assets e.g. reciprocal exchange of services, these are brought into account for tax purposes at their market value.

Other matters which were raised that may be of interest:

Inheritance Tax

From 6th April 2017, for taxpayers who pass their main residence to direct descendants on death, a new "main residence nil-rate" band has been introduced in addition to the usual nil-rate band.

The following new main residence nil-rate band will apply for years ending:
5th April 2018 £100,000
5th April 2019 £125,000
5th April 2020 £150,000
5th April 2021 £175,000
The existing nil-rate band is to be frozen at £325,000 until year ended 5th April 2021.

From 6th April 2016 the tax rate applicable on lump sum amounts paid from the pension of someone who dies aged 75 and over, will reduce from 45% to the recipient's marginal rate.
Note: marginal rate is a recipient's personal tax rate for a tax year.

Other Information

Savings

New "Lifetime ISA" from April 2017. Adults below 40 can contribute up to £4,000 each year and the government will provide a 25% bonus.

Normal ISA subscription limit increases to £20,000 from 6 April 2017.

Help to save scheme

New property and trading income allowance

Where turnover is below £1,000, will be no need to declare/pay tax on this income.

For turnover exceeding £1,001 will have a choice of deducting the allowance or calculating taxable profit in the normal way.

From April 2016 a new allowance will apply to residential landlords to provide relief for the cost of replacing furnishings.

"Rent-a-Room" relief will be increased from £4,250 to £7,500.

Whilst care has been taken in preparing this publication it is for information only. It is not, and should not be construed, as advice and accordingly no reliance should be placed on the information contained herein.