Making the most of fringe benefits
Changes introduced from April 2017 have largely removed the tax and national insurance contribution (NIC) advantages of many salary sacrifice arrangements.
You and your employees can still benefit, however, if salary sacrifice is based around pension contributions, childcare, low-emission cars or health-related benefits such as cycling to work.
Salary sacrifice is still tax efficient if it’s used to finance employer pension contributions. Employees paying higher rates of tax could give up £5,000 of their salary in return for the employer paying an equivalent amount into their pension scheme. This will save employer NICs at the rate of 13.8% (some £690), while the employee will save 40% income tax and 2% NICs (a total of £2,100). This type of arrangement is very tax effective because employer pension contributions are not a taxable benefit in the employee’s hands.
The same principle applies to childcare vouchers. Although these are being replaced by tax free childcare, employers still have until April 2018 to set up a new scheme. Employers can provide childcare vouchers valued up to £2,916 a year. Salary sacrifice to finance the purchase of a company car also escapes the new restrictions if the car’s CO2 emissions are 75g/km or less. Although not exempt from tax, the taxable benefit for such cars is fairly modest – at between 9–16% of the car’s list price. From April 2020, electric low emission cars will also be a factor. Ultra-low emission cars that can travel a high distance on just electric power will then be taxed very favourably.
Widening the range
There are, of course, tax advantages to providing fringe benefits outside salary sacrifice, although the full cost of provision then falls on the employer. The use of a flexible benefits package means that employees can select those benefits that suit them, and the services of a specialist provider could be useful.
Employers are also increasingly focusing on wellness with their benefits packages, with the aim of improving employee health – hopefully leading to reduced absenteeism and greater productivity. Tax-free wellness benefits can include a company gym, provided free or at a subsidised price; healthy food in a company canteen; or annual health checks, counselling and eye tests (where an employee is required to use a computer).
If a wellness benefit is not tax free, such as membership of a third party gym or the provision of health monitors, there should still be a saving on employee NICs. Bulk purchase discounts could also mean a reduced cost. As the world of work changes, there are new opportunities to engage employees with the benefits of working with an organisation.