Many benefits, including childcare vouchers up to the exempt limit and mobile phones, can be provided free of tax and National Insurance.
While a tax-free benefit is valuable in the hands of the employee, the employer is left to meet the cost.
By using a salary sacrifice arrangement it is possible for the employer to pass the cost of the benefit to the employee and for the employee to save tax and National Insurance and the employer to save National Insurance.
Under a salary sacrifice arrangement the employee gives up cash salary for a tax and NIC-free benefit. The employee saves the tax and NIC on the salary given up and the employer saves the employer’s NIC.
A word of caution – care must be taken to ensure that the salary sacrifice arrangement is effective. The employment contract should reflect the revised arrangements and the employee must not be able to revert back to the higher salary at will. HMRC are looking at salary sacrifice schemes and some exemptions do not apply where the benefit is provided by means of a salary sacrifice arrangement. It may be a case of use salary sacrifice schemes while you still can.
James’ employer wishes to provide James with a mobile phone. However, the employer does not wish to meet the cost of the phone.
James and his employer enter into a salary sacrifice agreement where James agrees to give up £420 of his annual salary in return for the provision of the mobile phone. The phone contract is between the employer and the mobile phone company.
James is a higher rate taxpayer. He saves tax of £168 (£420 @ 40%) and National Insurance of £8.40 (£420 @ 2%) as a result of swapping cash salary for the exempt benefit of a mobile phone – a total saving of £176.40.
James’ employer saves employer NIC of £57.96 (£420 @ 13.8%).
A win-win situation.