Salary sacrifice allows an employee to give up part of their salary in return for a non-cash benefit from their employer like pension contributions. This reduces income tax and employee NI contributions, resulting in higher pension contributions at no extra cost to the employer. HMRC views this as a legitimate way to take advantage of tax exemptions for certain benefits, not tax avoidance. Employers can implement salary sacrifice by changing employment contracts with employee agreement for at least a 12 month period.

1. Salary Sacrifice

2. Salary sacrifice
What is salary sacrifice?
Individual i
I di id l gives up the right t part of their salary i return f th
th i ht to t f th i l in t for the
employer’s agreement to provide a non cash benefit:
– Childcare vouchers
– Employer pension contribution
Suitable for:
– Staff
– Directors

3. Salary sacrifice
Typically this is done with no reduction to
individual’s
i di id l net spendable income
d bl i

4. Salary sacrifice
Consider an employee paying personal pension contributions…
It may be possible t
b ibl to:
– Reduce salary
– Pay employer p
y p y pension contributions instead
With the result that:
– A greater amount is invested in pension
But ensuring:
– Employee is not worse off
– Employer is not worse off

5. Salary sacrifice
Salary sacrificed for an employer pension contribution
Employee:
E l
– Salary sacrificed
Not subject to income tax or employee NI
– Employer pension contribution
Not subject to income tax or employee NI
Employer:
– Corporation tax relief available
Whether salary or employer pension contribution
– Reduced salary means
Reduction in employer NIC

6. Salary sacrifice
Further benefit
The
Th employer NIC saving can b given up and channelled i t an
l i be i d h ll d into
increased employer pension contribution:
– Reward staff at no cost to employer

7. Salary sacrifice
Salary sacrifice
Does HMRC not view thi as t avoidance?
D t i this tax id ?
No!!
– It is commonly used to take advantage of the exemption from tax/NI
of certain benefits
– HMRC recognise the legitimacy of this...
“Arrangements which are designed to make use of these exemptions
should not be regarded as avoidance” (HMRC manual)
Note that salary sacrifice agreements dated 22/4/09 or later will not
reduce income below £150,000 for the purposes of the Special Annual
Allowance charge

8. Salary sacrifice
HMRC even offer guidance on their website…
g
http://www.hmrc.gov.uk/specialist/salary_sacrifice.pdf

9. Salary sacrifice
How to implement
It is a matter of employment law, not tax law. Therefore,
i tt f l tl tt l Th f
– Employee must agree to the lower salary before it is received
– Entitlement to salary must be genuinely reduced
y g y
– Reduced salary should last for at least 12 months
– Payslip should reflect reduced salary

10. Salary sacrifice
HMRC agreement?
No
N requirement t i f
i t to inform HMRC
HMRC:
– But can do for reassurance
– HMRC may agree that the changes to the employee contracts do
y g g p y
affect entitlement to earnings for tax and NI

11. Salary sacrifice
Example
In t
I tax year 2009/10, employee:
2009/10 l
– Earns £49,000
– Pays £2,400 net p
y pension contributions
Employer cost:
– Employer NIC due £5 540
£5,540
– (£49,000-£5,715)@12.8%
– Total cost £49,000+£5,540 = £54,540
Employee tax position…

12. Salary sacrifice
Example continued
£
Salary 49,000
Income tax due
£6,475
£6 475 @ 0% 0
£37,400 @ 20% (7,480)
£3,000 @ 20% (600)
£2,125
£2 125 @ 40% (850)
NICs due
£5,716 to £43,875 @ 11% (4,198)
£43,876 £49,000
£43 876 to £49 000 @ 1% (51)
Income after tax & NI 35,821
Net pension contributions (2,400)
Net spendable income 33,421
33 421

13. Salary sacrifice
Assume salary sacrificed of £3,050

14. Salary sacrifice
Example continued
£
Reduced salary 45,950
Income tax due
£6,475 @ 0% 0
£37,400 @ 20% (7,480)
£2,075 @ 40% (830)
NICs due
£5,716 to £43,875 @ 11% (4,198)
£43,876 to £45,950 @ 1% (21)
Net spendable income (as before) 33,421

15. Salary sacrifice
Example continued
Prior to l
P i t salary sacrifice:
ifi
– Personal pension contribution £2,400 net
– Amount invested in pension £3,000
p
After salary sacrifice:
– Employer pension contribution of £3 050
£3,050
– Enhanced by employer NIC saving £390
– Total pension contribution £3,440
– Increase of 14.67%

16. Salary sacrifice
Recap
Before
B f After
Aft
Employee: Employee:
– Salary £49,000
y – Salary £45,950
y
– Spendable income £33,421 – Spendable income £33,421
– Invested in pension £3,000 – Invested in pension £3,440
Employer: Employer:
– Salary paid £49,000 – Salary paid £45,950
– Employer NIC £5,540 – Employer NIC £5,150
– Total cost £54,540 – Pension cont’n £3,440
– Total cost £54,540

17. Salary sacrifice
How I can help you…
Individual l l ti
I di id l calculations:
– Personalised reports
Presentations:
– one to ones
– financial advice
Implementation:
– Liaise with others

18. Salary sacrifice
Summary
Opportunities greater than ever before:
O t iti t th b f
– Employee NI upper earnings limit aligned with starting point
for higher rate tax
– Potential 40% income tax + 11% NI
– 51% in total
Reward staff in these difficult times:
– At no cost!