Is it time to review your salary sacrifice arrangements?
You may have read that new rules for taxing many salary sacrifice arrangements come into force from 6 April 2017.
What do we mean by salary sacrifice?
One of the employment trends of recent times has been to make employee remuneration packages much more flexible. So , instead of pay (and if you are lucky, a company car and healthcare), so called ‘cafeteria remuneration’ has become common which gives employees the choice of sacrificing pay for a wide range of benefits which can range from extra holiday to gym membership and mobile phones.
Employers and employees have gained from these arrangements:
- Employers saved on national insurance contributions (NICs) at a rate of 13.8% of pay. Some (or even all) of that reduced bill may well have been passed on to the employee.
- Employees also saved NICs, generally at 12% if they were basic rate taxpayers and 2% if they paid higher or additional rates.
- Crucially, the taxable value of the benefit was less than the pay forgone and in some instances- such as the mobile phone or gym membership- the tax liability was nil.
Given that the main loser from salary sacrifice arrangements has been HM Treasury, it was of little surprise when George Osborne signalled a review in last year’s Budget. This produced a consultative document that has now been transformed into draft legislation.
The changes, which took effect from the start of the 2017/18 tax year, remove most of the advantages of salary sacrifice, with a few important exceptions. For new schemes, income tax and employer’s NICs will be based on the greater of:
- The salary forgone; or
- The taxable value of the benefit received (which will be less, as otherwise the arrangement would normally not make sense).
There are some inevitable transitional measures for arrangements in force before 6 April 2017, but apart from cars, employer-provided accommodation and school fees funding, the new rules will bite in no more than 12 months’ time.
Keith Bonner, Director and lead Independent Financial Adviser at HSCFS says “There are also a handful of specific exemptions, one of the most important of which is salary sacrifice arrangements for pension contributions. These continue to provide major benefits”
The table below shows how:-
Still a sensible sacrifice
Liz is a higher rate taxpayer who normally contributes £5,000 a year (before tax relief) to a self-invested personal pension. Instead, she could sacrifice £4,394 of her salary to achieve the same result via an employer pension contribution and save £778 in salary (an extra £451 net, after tax and NICs), assuming her employer rebates their full NIC saving:
|Personal Payment||Salary sacrifice|
|Employer’s NIC Saving @ 13.8%||-||606|
|Employee’s NIC @ 2%||-103|
|Tax @ 40%||-2,069|
|Pension Contribution net of tax reliefs||3,000|
|Tax relief £5,000 @ 40%||2,000|
|Gross Pension Contribution||5,000||5,000|
For a personalised illustration of how salary sacrifice could boost your pension contributions, please talk to us. It could make up for the extra tax you will end up paying on other sacrifice arrangements…
For Pension advice and Tax advice please contact Keith Bonner on 01273 710404 or firstname.lastname@example.org
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.