In an effort to reduce costs, many companies have introduced salary sacrifice arrangements during the last decade. For many years, high-earners have sacrificed bonuses in lieu of more tax and NI effective pension contributions, but today, there is a surprising variety of schemes, spanning a range of benefits and expenses.
The recent explosion in the popularity of salary sacrifice began about 10 years ago when some very large employers applied the concept of pensions sacrifice to regular pension contributions. Although the name was coined by one of the “Big 4”, these schemes are now commonly referred to as Smart Pensions, and have been implemented by more than half of all employers.
As the government introduced tax efficient benefits, such as bikes for work, the home computing initiative and child care vouchers, employers expanded their salary sacrifice arrangements. The arrangements described so far are relatively benign and so when the financial products disclosure rules were introduced these arrangements were not even regarded as disclosable schemes. However, there are some salary sacrifice arrangements that HMRC does not encourage, including travel expense and subsistence related schemes and schemes involving works canteens. HMRC has sought to make the subsistence schemes so hard to administer that they are no longer cost effective, while arguing that canteen related schemes do not accord with the legislation on free and subsidised workplace meals.
As the number of schemes has grown, employers have been able to make significant employment cost savings. Employees, meanwhile, have been able to make real savings in the cost of everyday expenditure, particularly child care or workplace paring.
But the latest scheme to be unveiled promises to be the best ever for employees, as it is now possible to acquire a car via salary sacrifice. Some large accountancy firms have operated such schemes for many years, but over the last 18 months these schemes have entered the mainstream market and are now being proactively sold by professional practices and fleet leasing companies. Given the number of cars that have very low CO2 emissions, employees have a wide range of choice and can save hundreds of pounds per year, or thousands over the replacement cycle of the car. The savings are generated because the tax and NI on the benefit in kind is lower than that on the salary foregone, and because employers are able to negotiate sizeable discounts on the cost of the cars themselves.
Given the top rate of income tax rises to 50% next year, and NI rates increase from April 2011, salary sacrifice schemes should continue to increase in popularity. Employers who wish to generate cost savings, whilst making employees’ remuneration as tax effective as possible, should consider using salary sacrifice as part of their reward package. However, whilst the principle is tried and tested and HMRC is generally supportive, employers must ensure that schemes are technically robust and not open to challenge by HMRC; although many schemes are built around government supported tax-free benefits, if they are implemented incorrectly HMRC can, and will, seek repayment of income tax and NI from the employer.
We, at ActionTax, have many years experience of implementing sacrifice schemes and would be pleased to assist you to introduce a new scheme and so broaden your benefit options, whilst ensuring that any new arrangement complies fully with HMRC expectations concerning salary sacrifice.
For those already operating salary sacrifice, we would be pleased to carry out an audit to ensure that income tax and NI relief have been properly applied. A key reason for undertaking a review is the changing focus of HMRC and the new ways of working it is adopting; HMRC is now focussed on systems and processes and is applying a risk-based approach to tax compliance. In determining employment tax risk, HMRC will take into account how well employers manage salary sacrifice schemes, especially in light of its perception of certain aggressive sacrifice arrangements such as works canteen schemes.
Many employers appreciate the benefit of telling HMRC that a salary sacrifice review has been completed and, either disclosing any issues identified or confirming that the processes are satisfactory and there is nothing for HMRC to be concerned about. Any employer should benefit from making a voluntary disclosure to HMRC, as it should be taken in to account in determining the employer’s risk profile, particularly in light of the changing emphasis of HMRC and the benefits available from securing a low risk rating.
