When payslips are opened towards the end of this month, most workers will probably look first for their net pay figure in hope of a new year rise.
They may be better served, however, by giving more thought to the non-cash benefits employers commonly offer, some of which come with large tax advantages.
Pensions are the most obvious example, says Debi O’Donovan, a partner at the Reward and Employee Benefits Association (Reba), but there is “a myriad of benefits” that employers make available through the tax-efficient mechanism of salary sacrifice.
By agreeing to forgo an agreed slice of their salary, employees can receive a benefit of equivalent value while reducing their income tax liabilities and national insurance contributions (NICs).
By sacrificing, for example, £1,000 of gross salary in return for tax-exempt benefits worth £1,000, a basic rate taxpayer would be better off by up to £320. For a higher rate earner, the net saving could be £420.
Jonathan Watts-Lay, director of Wealth at Work, a provider of financial education for workers, says the value of salary sacrifice depends on individual circumstances. “Some people can be quite cute about it. If you’re just above the threshold of higher and basic rate tax, say, it could take you below it.”
Salary sacrifice could be especially attractive to those earning just above £100,000, he says, because it can effectively return some of their personal allowance — which is tapered away above this point, creating a marginal income tax rate of 60 per cent. For someone earning £110,000, sacrificing £5,000 of their gross salary could leave them better off by up to £3,100.
The net benefits can be greater where employers, who lower their own NICs through salary sacrifice, agree to divert their tax savings to the employee. Mr Watts-Lay says not all companies do this.
Not all benefits qualify for salary sacrifice. Among those that do are additional pension contributions.
For a basic rate taxpayer liable for NICs at 12 per cent, redirecting £5,000 of their annual salary into their pension through salary sacrifice could save them a net £600, assuming these additional contributions are not matched by their employer. This could prove more attractive to those approaching retirement, who would be able to access their pension savings sooner.
Income tax relief can be claimed on all pension contributions up to the annual and lifetime allowances — currently £40,000 and £1.25m — making additional contributions also attractive to many higher earners within these thresholds.
Any salary sacrifice set up on or after July 9 2015 will, however, count towards a taxpayer’s income for the purpose of calculating whether new restrictions on tax-free pension contributions apply. From April, the annual allowance will be tapered by £1 for every £2 earned above £150,000.
Another valuable form of salary sacrifice relates to childcare vouchers, which are also tax-free and are not liable for NICs, where employers offer them.
Working parents can currently save up to £933 a year in tax and NICs on the cost of childcare for under-16s by claiming employer vouchers through salary sacrifice. The net benefit for parents whose income breaches the higher rate threshold (£42,385) is restricted to £623 a year, but each parent can claim.
Andrew Drake, head of rewards and benefits at consultants JLT Employee Benefits, says most working parents are better off buying employer vouchers, but claimants should be mindful of how any child tax credits could be lost. When children grow too old to qualify, employers will normally revert previously sacrificed pay to gross salaries, he says.
The introduction of a new childcare subsidy in 2017 will however see the closure of salary sacrifice voucher schemes to new claimants.
Whether parents will be better or worse off under tax-free childcare — which will match spending on under-12s by up to £2,000 per child each year — depends on circumstances. Larger families with two working parents are likely to benefit, as well as the self-employed who are currently excluded, but households with one income exceeding £100,000 will not qualify.
Mr Drake says it would be prudent for eligible parents to join an employer voucher scheme before 2017, as they can always transfer to tax-free childcare at a later date if they wish.
Benefits in kind
Many workplace benefits may be eligible for salary sacrifice, therefore saving employee NICs, but are subject to tax. The most widely enjoyed “benefits in kind” are company cars and private medical and dental insurance.
Although the popularity of the former has waned over the past decade, with less than 1m employees now driving company cars, Mr Drake says the value proposition has improved, with more cost effective leasing structures.
With tax dependent on emissions, polluting company cars — especially diesels — can be tax inefficient. “If you have some gas guzzler, you could be in for a massive benefit-in-kind charge, where as if it is an electric or hybrid car, the tax could be really low,” says Mr Watts-Lay.
Private medical and dental cover is a more popular benefit, enjoyed by roughly 2.3m workers in 2013-14, according to HMRC figures. The main advantage of employer schemes is that they normally negotiate premiums well below market prices for their workers, even if they do not subsidise participation themselves, says Ms O’Donovan.
Loans made on beneficial terms are also deemed to be benefits in kind, although annual amounts up to £10,000 — including most season ticket loans — are exempt from tax.
Ms O’Donovan says employers are increasingly turning to more flexible benefits, reflecting demand from different age groups.
By offering employees an annual benefits allowance that they can allocate as they wish from various options, costs can also be controlled in the face of inflationary pressure from the likes of insurers.
Among the range of increasingly popular lifestyle benefits, says Mr Drake, is the “hugely popular” ability for employees to buy, and occasionally sell, annual leave. Home technology is another, he says, citing a Reba survey that found 42 per cent of employers intend to offer free or subsidised gadgets to workers in 2016, up from 23 per cent in 2015.
Mr Watts-Lay says growing numbers of large employers also offer their workers card or voucher schemes that can save them money on their shopping and leisure activities.
While there is no tax advantage, as any charges are made from taxed income, the schemes — promoted by many retailers and restaurants — can deliver value, he says. “It costs the employer peanuts . . .[and] it’s a great way for employees to save money.”
Another valuable workplace benefit available to millions of workers is company share schemes, participation in which saved employees £1.1bn in tax in 2013-14.
The latest government figures show that 460 companies operate Save As You Earn (SAYE) schemes, with roughly one in three eligible employees — more than 1.4m — enrolled in 2014, according to industry body IFS Proshare.
Participants in SAYE save between £5 and £500 a month from their post-tax salary and at the end of a fixed term — three or five years — can exchange their savings for shares in their employer at a discounted “strike” price agreed when the scheme started.
Unlike SAYE, share incentive plans confer tax advantages as contributions are made before tax and NICs. Although share incentive plans savings are capped at £1,800 a year, employers can give two matching shares for each that is bought and £3,600 in free shares can also be granted, meaning that up to £9,000 of shares can be saved each year.
Where companies offering a SAYE scheme also have a share incentive plans — as 30 per cent do, according to IFS Proshare — share incentive plans tend to be more attractive, especially for higher earners. However, shares must be held in a plan for at least five years to be exempt from tax and NICs.
Get on your bike
A popular form of salary sacrifice, and one that enjoys full tax advantages, is a government-sponsored cycle-to-work scheme. According to Cyclescheme, 581,000 bikes have been bought to date.
Monthly payments are taken from payroll earnings for a year, with a small final payment. As deductions are made from gross salary, higher rate taxpayers save 42 per cent on the cost of buying a bike.
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