Should you consider a Salary Sacrifice Arrangement to reduce tax and NICs?
With the increases in National Insurance Contributions (NIC) from 6 April 2022 many employees and their employees are considering changing their entitlement to their contractual salary for either tax free benefits in kind such as additional contributions into their pension, or benefits in kind that have a low tax and NIC charge such as an electric company car. This needs to be done with care and requires a change to the Contract of Employment.
From 6 April 2017 where a benefit is given as part of optional remuneration arrangement (salary sacrifice), the rules for valuing the amount of the benefit treated as earnings from the employee’s employment has changed.
Where a benefit is given under optional remuneration arrangements, the general rule is value of the benefit treated as earnings from the employment is the greater of the amount of:
- salary or cash pay given up by the employee in return for the benefit
- the benefit treated as earnings from the employment under the normal rules, ignoring any amount made good, as outlined in HMRC booklet 480
The 5 exceptions to this rule are:-
- employer pension contributions;
- employer-provided pension advice;
- employer-supported childcare and provision of workplace nurseries; and
- cycles and cyclist’s safety equipment
- Ultra – Low (< 75g) CO2 emission cars
Many employers have started offering zero or low emission cars as an alternative to additional or reduced salary entitlement. The normal optional remuneration arrangement rules do not apply to cars with CO2 emissions of 75 grams per kilometre (km) or less. Cars with CO2 emissions of 75 grams/km or less continue to be taxed on the cash equivalent of the benefit worked out under the normal rules without having to make a comparison with the salary foregone.
An employee is given an electric car which is available for their private use under an optional remuneration arrangement in which the employee gives up salary of £150 per month, or £1,800 per year. The car has zero CO2 emissions and has a list price of £40,000 and a cash equivalent value of £800 (£40,000 x 2%). The relevant amount to be treated as earnings from the employment is the £800 cash benefit because its CO2 emissions are no more than 75 grams.