Salary Exchange

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How to use Salary Exchange

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Salary Exchange

  1. 1. Salary Sacrifice
  2. 2. Salary sacrifice What is salary sacrifice? Individual i I di id l gives up the right t part of their salary i return f th th i ht to t f th i l in t for the employer’s agreement to provide a non cash benefit: – Childcare vouchers – Employer pension contribution Suitable for: – Staff – Directors
  3. 3. Salary sacrifice Typically this is done with no reduction to individual’s i di id l net spendable income d bl i
  4. 4. Salary sacrifice Consider an employee paying personal pension contributions… It may be possible t b ibl to: – Reduce salary – Pay employer p y p y pension contributions instead With the result that: – A greater amount is invested in pension But ensuring: – Employee is not worse off – Employer is not worse off
  5. 5. Salary sacrifice Salary sacrificed for an employer pension contribution Employee: E l – Salary sacrificed Not subject to income tax or employee NI – Employer pension contribution Not subject to income tax or employee NI Employer: – Corporation tax relief available Whether salary or employer pension contribution – Reduced salary means Reduction in employer NIC
  6. 6. Salary sacrifice Further benefit The Th employer NIC saving can b given up and channelled i t an l i be i d h ll d into increased employer pension contribution: – Reward staff at no cost to employer
  7. 7. Salary sacrifice Salary sacrifice Does HMRC not view thi as t avoidance? D t i this tax id ? No!! – It is commonly used to take advantage of the exemption from tax/NI of certain benefits – HMRC recognise the legitimacy of this... “Arrangements which are designed to make use of these exemptions should not be regarded as avoidance” (HMRC manual) Note that salary sacrifice agreements dated 22/4/09 or later will not reduce income below £150,000 for the purposes of the Special Annual Allowance charge
  8. 8. Salary sacrifice HMRC even offer guidance on their website… g http://www.hmrc.gov.uk/specialist/salary_sacrifice.pdf
  9. 9. Salary sacrifice How to implement It is a matter of employment law, not tax law. Therefore, i tt f l tl tt l Th f – Employee must agree to the lower salary before it is received – Entitlement to salary must be genuinely reduced y g y – Reduced salary should last for at least 12 months – Payslip should reflect reduced salary
  10. 10. Salary sacrifice HMRC agreement? No N requirement t i f i t to inform HMRC HMRC: – But can do for reassurance – HMRC may agree that the changes to the employee contracts do y g g p y affect entitlement to earnings for tax and NI
  11. 11. Salary sacrifice Example In t I tax year 2009/10, employee: 2009/10 l – Earns £49,000 – Pays £2,400 net p y pension contributions Employer cost: – Employer NIC due £5 540 £5,540 – (£49,000-£5,715)@12.8% – Total cost £49,000+£5,540 = £54,540 Employee tax position…
  12. 12. Salary sacrifice Example continued £ Salary 49,000 Income tax due £6,475 £6 475 @ 0% 0 £37,400 @ 20% (7,480) £3,000 @ 20% (600) £2,125 £2 125 @ 40% (850) NICs due £5,716 to £43,875 @ 11% (4,198) £43,876 £49,000 £43 876 to £49 000 @ 1% (51) Income after tax & NI 35,821 Net pension contributions (2,400) Net spendable income 33,421 33 421
  13. 13. Salary sacrifice Assume salary sacrificed of £3,050
  14. 14. Salary sacrifice Example continued £ Reduced salary 45,950 Income tax due £6,475 @ 0% 0 £37,400 @ 20% (7,480) £2,075 @ 40% (830) NICs due £5,716 to £43,875 @ 11% (4,198) £43,876 to £45,950 @ 1% (21) Net spendable income (as before) 33,421
  15. 15. Salary sacrifice Example continued Prior to l P i t salary sacrifice: ifi – Personal pension contribution £2,400 net – Amount invested in pension £3,000 p After salary sacrifice: – Employer pension contribution of £3 050 £3,050 – Enhanced by employer NIC saving £390 – Total pension contribution £3,440 – Increase of 14.67%
  16. 16. Salary sacrifice Recap Before B f After Aft Employee: Employee: – Salary £49,000 y – Salary £45,950 y – Spendable income £33,421 – Spendable income £33,421 – Invested in pension £3,000 – Invested in pension £3,440 Employer: Employer: – Salary paid £49,000 – Salary paid £45,950 – Employer NIC £5,540 – Employer NIC £5,150 – Total cost £54,540 – Pension cont’n £3,440 – Total cost £54,540
  17. 17. Salary sacrifice How I can help you… Individual l l ti I di id l calculations: – Personalised reports Presentations: – one to ones – financial advice Implementation: – Liaise with others
  18. 18. Salary sacrifice Summary Opportunities greater than ever before: O t iti t th b f – Employee NI upper earnings limit aligned with starting point for higher rate tax – Potential 40% income tax + 11% NI – 51% in total Reward staff in these difficult times: – At no cost!

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