PKF's salary-sacrifice advice to ease credit-crunch pain
Accountants and business advisers PKF East Anglia say bosses and their workers struggling through the credit crunch should look at 'salary sacrifice' as a way to ease financial woes.
With money getting tighter for employers and employees alike, Peter Harrup, tax partner at PKF, which has offices in Ipswich, Norwich and Great Yarmouth, says employers can offer benefits to their staff that will help reduce their National Insurance and tax obligations.
Peter explains: 'These salary sacrifice arrangements mean employees give up the right to receive part of their cash pay in return for the employer's agreement to provide them with some form of non-cash benefit.'
These range from environmental incentives such as meeting nearly half the cost of a bike so that an employee can cycle to work, to offering to pay part of an employee's wages in the form of childcare vouchers, bus-pass season tickets or increased pension contributions.
Peter says: 'Childcare vouchers, for both spouses, are a cost-effective way an employer can support staff with family responsibilities, so long as the couple is meeting childcare costs themselves.'
However, his advice is to check with HM Revenue and Customs (HMRC) as in certain circumstances if a household is claiming Working Family's Tax Credits they may not be better off.
Salary sacrifice is becoming more common in the payment of contributions to personal pension plans. Peter says: 'Under a standard contribution method, employees make contributions from their net pay after basic-rate tax relief. This means that if they have agreed to pay £100 a month, the amount actually deducted is £80 with HMRC adding the £20 tax relief back once it has been received by the provider of the plan.
'If salary sacrifice is used the employee sacrifices the £100 from their gross pay before tax and National Insurance is calculated. The result is that the employee sees the same amount being paid in to the pension plan but does not pay tax or National Insurance on the £100, meaning their take-home pay goes up by approximately 6% for a basic-rate tax payer.
'Alternatively, the employee can agree to sacrifice more but leave their take-home pay the same. Again for a basic-rate tax payer, this can increase the amount paid in the pension plan by upwards of 16%.
Salary sacrifice can also help employees with bus transport season tickets: 'The employee pays for the season ticket from their pre-tax salary and therefore does not pay income tax or National Insurance on the cost of the ticket.
Effectively, it means that if an annual bus pass costs £600, it would be reduced to £408 for a basic-rate tax payer and to £349 for a higher-rate tax payer,' says Peter.
The same benefits apply to train travel and encompass season-ticket interest-free loans, so long as the cost does not exceed £5,000 per annum.
With the introduction of the Government's Green Transport Plan, employees can purchase a bicycle and associated equipment to enable them to travel to work in a tax efficient and environmentally friendly manner.
Peter says: 'The scheme is very simple. The employee finds the bike they wish to purchase and sacrifices the cost of the bike and any accessories from their salary. The cost is deducted from salary before tax and National Insurance is calculated, which then reduces the price of the bike to the employee. In addition, as the bike is effectively purchased by the employer, there is no VAT paid on the bike.'
So if the bike they want costs £250, the scheme effectively reduces the cost to the employee to £142, which is deducted monthly from their salary over a 12-month period. These arrangements are straightforward to install and run but must be set up properly to meet HMRC requirements.
For more information contact PKF on 01473 320700.