Many employees offer private healthcare, death in service and personal health insurance as benefits to employees. There are also benefits that are afforded by way of salary sacrifice “non-cash benefits”. There are numerous forms of non-cash benefit that an employer can offer to employees. This quick guide looks specifically at “Cycle to Work” schemes, season ticket loans and enhanced pension contributions. The principles and administration of all salary sacrifice arrangements are broadly similar.
A salary sacrifice arrangement involves an employee giving up part of his or her entitlement to salary in exchange for a non-cash benefit. This arrangement means that there are savings for both the employee and employer: The employee is subject to less income tax and National Insurance (but will receive lower net pay); the employer is subject to lower NICs.
Cycle to Work schemes were set up in the UK to encourage healthier lifestyles for employees.
They work by allowing employers to pay the full cost of bicycles and cycling equipment for staff, up to a maximum of £1,000.
The employee then reimburses the employer through a salary sacrifice arrangement which will usually be over a 12 month period, but can be up to 18 months.
The employer owns the bicycle and equipment and rents this to the employee and arrangements can be made for ownership to be transferred to the employee at the end of the scheme. If registered for VAT, the company can reclaim the VAT on the purchase, but would charge the employee VAT on the rental.
Employers can save up to 13.8% on NICs and boost their green credentials.
Schemes are offered by many bike shops – so signing up to these is often an efficient way to operate this, but make sure that payroll is advised to make the deductions.
Season tickets are train tickets that can be purchased for short and medium distance journeys.
They can be bought in weekly, monthly or annual blocks with discounts for paying in advance and in full. Where taking the same journey 3 times per week or more, a season ticket can provide significant cost savings.
Employers can provide season ticket loans to employees without charging interest with no benefit arising, or some choose to charge a nominal level.
The money can be paid either directly to the travel company or to the employee by way of reimbursement or as an advance to assist the purchase.
The maximum loan outstanding must not exceed £10,000.
Repayments are then taken from the employee’s salary by way of a salary sacrifice arrangement, usually in instalments of 10 or 12. These loans must be recorded by way of an agreement.
Employees can increase their pension contributions by way of a salary sacrifice arrangement. As opposed to paying more into a pension from their net pay, the salary sacrifice route can save the employee 2% on NI contributions where they earn above the Upper Earning Limit (UEL) and 12% where below the UEL.
Employers will save 13.8% on the amount sacrificed.
The salary sacrifice arrangement can be set up through your payroll and administered at no additional ongoing cost. The arrangements will need to be reported on a P11D form (you can find more information in this OC quick guide).
It is essential that you take tax advice before setting up a salary sacrifice arrangement as there are specific technicalities relevant to different benefits. Certain proposed uses of salary sacrifice arrangements will not allow employers to be exempt from payment of NICs.
Disclaimer: This note does not contain a full statement of the law and it does not constitute legal advice. Please seek legal advice if you have any questions about the information set out above.
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