Schemes that give employees the opportunity to forego some of their salary in return for other - often more appealing - non cash benefits, significantly reduces the tax liability for organisations and their employees. By paying for these benefits out of their gross salary, an employee can reduce his or her liability to income tax and National Insurance as essentially, they are earning less. In turn, the employer also benefits through lessening its National Insurance responsibility; the savings from which can either be reinvested in other flexible benefit schemes or absorbed back into the company’s P&L.
There is no question that the Chancellors "fair but tough" budget was hard-hitting. So, for those individuals seeking to mitigate the major - and often painful - tax rate changes outlined in the emergency Budget, Salary Sacrifice arrangements provide a compelling route through which to "bump up" take-home pay. Indeed, by entering into a salary sacrifice arrangement that could keep earnings under £100,000, high earning employees will not only significantly reduce their personal tax liability, but can also protect some of their £6,475 personal allowances if they hit "the sweet spot" (earning between £100,000 and £112,950).
This appears, on face-value, to be a win-win situation; yet while sacrificing salary can unquestionably form part of an effective tax planning strategy for a large proportion of tax payers, the benefits of salary sacrifice do not extend to everyone, nor will they apply to those earning over £150,000 per annum. With the introduction of the 50% tax rate, the Government has clearly stated that it will penalise any tax payers trying to avoid the new tax hike by entering into a Salary Sacrifice arrangement for tax evasion.
This clearly reiterates the need for employers to be vigilant in ensuring any Salary Sacrifice arrangement is fully compliant with HMRC guidelines and capable of achieving a mutually beneficial outcome for both the organisation and its people.
The tax savings offered through Salary Sacrifice are indisputable, but the secret to success in terms of uptake lies firmly in the employee engagement process. For the vast majority of employees, the concept of ‘earning less to receive more’ is an alien one, so employers should demonstrate good duty of care by investing time to educate their people on the benefits, complexities and potential drawbacks associated with Salary Sacrifice in order to ensure they fully understand the remuneration options available to them. Not only can this help to drive employee uptake by helping to show how the business has invested in its people, but also gives employees the flexibility to select those tax breaks that will benefit them most over the long-term.
As illustrated by the recent tax complications surrounding the Cycle to Work Scheme, there is a clear and pressing need for organisations to be vigilant in ensuring any salary sacrifice arrangement is both feasible and HMRC compliant. By seeking the support and expert guidance of HMRC, accountants, business software support teams or even similar organisations with experience of implementing sacrificed schemes, firms can ensure that their remuneration packages are as effective and practical as possible. Equally, though investing in payroll software that takes care of PAYE regulation and can accurately track what has been paid against what has been saved; businesses can not only achieve a running total of the tax savings made, but also benefit from administration and calculation efficiencies that will reduce the burden on payroll.
Leisa Docherty, head of HR and reward at Sage UK