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Under your employment contract, there may come a time where you as an employee may be entitled to certain benefits from your employer. This could take the form of a childcare voucher. In these circumstances, there are tax benefits for you as an employee. A more complicated salary sacrifice scheme may also be available, such as a company car salary sacrifice scheme which is explained in more detail below. What is Salary Sacrifice? Firstly, salary sacrifice happens when instead of receiving a full month’s salary, an employee will forego the right to part of his/her salary in return for the employer providing some form of non-cash benefit. This has to be agreed upon by the employer and employee under their contract. The major consequence of this is that an employee will agree to salary sacrifice in return for this non-cash benefit and in addition to this, give up their contractual entitlement to future cash remunerations. In some situations, where the benefit provided is tax efficient, this may end up with the employee paying less tax as a result. What are the tax benefits? The major tax benefit of such a scheme comes in the form of both tax and NIC benefits. As the taxable salary is in essence exchanged for non-cash benefits, the amount that is deducted will be deducted gross (i.e. before tax deductions and NIC payments are calculated). This ultimately means that you will have a lower gross salary (in return for the non-cash benefit) but additionally, you will have a lower tax and NIC bill. How to report these non-cash benefits If you do participate in a salary sacrifice scheme and receive non-cash benefits, it is then the duty of your employer to ensure that these are declared correctly with HMRC. This is because there are different requirements for cash and non-cash benefits, some of which are also tax free. In general however, any benefit that you receive under employment must be reported to HMRC during the year end reporting of P11Ds or P9Ds. Company Car Salary Sacrifice Scheme A more complicated salary sacrifice scheme would be a company car salary sacrifice. This is a scheme which is offered to all employees and not just those that are entitled to a car benefit. The major benefit for the employer is that this scheme can be operated at no cost. This scheme operates with each employee choosing a car to lease under certain contractual terms that suit their requirements. As it is leased, the car is deemed a company car for taxation purposes (i.e. has to be declared on P11Ds or P9Ds). Once the employee has specified and chosen what they want, part of their salary is offset against this cost for the leasing and insuring of the car. This salary that is sacrificed will have tax and NIC savings (as above with childcare vouchers). As the car is deemed a company car, the employee will have to pay tax on the company car benefit but if they choose a low emissions vehicle, then this taxable benefit charge will be significantly lower than the tax and NIC for this amount sacrificed. If you would like more information about salary sacrifice and other benefits you could give your employees and how to treat these under your payroll, then please do contact us on 020 8952 0140 or email [email protected] where one of our payroll specialists will be more than happy to assist you.
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