Rates of exchange

Salary sacrifice is a mechanism to renegotiate remuneration by swapping an element of a salary for an exempt or tax-efficient benefit. In this second part, Lorraine Owens clarifies which other benefits are covered by the scheme

For a salary sacrifice to be effective, two conditions must be met: the potential future remuneration must be given up before it is treated as received for tax or NIC purposes and the true construction of the revised contractual arrangement between employer and employee must be that the employee is entitled to lower cash remuneration and a benefit.

One should also consider what effect the salary sacrifice will have on other areas such as the amount of pay used to calculate usual pension contributions, future salary increases, the impact on mortgage applications, National Minimum Wage and statutory maternity pay.

One myth about salary sacrifice is that a scheme must be offered to all employees. This is true only for those benefits where the actual tax exemption rests on all employees being allowed to participate, such as the bike to work scheme and childcare vouchers.

Accommodation
Many schools provide accommodation to employees. Often this is provided free, but there are situations where schools charge employees for accommodation. Where the rent charged to employees is higher than the benefit-in-kind value for tax purposes, there is scope for salary sacrifice to be used.

School fees of employees’ children
As the benefit-in-kind value of school fee remissions is based on the marginal cost, typically a figure of 15 per cent of the total fees, it is a tax-efficient benefit and so salary sacrifice can be used.

Pension scheme salary sacrifice
Although pension contributions are tax-efficient, employee pension contributions are liable to NICs. Salary sacrifice for pension contributions enables NIC savings as well. The salary sacrifice can cover the employees’ usual pension and additional contributions if permitted by the scheme rules.

Childcare vouchers
Childcare vouchers providing up to £55 per week per employee are exempt from tax if the vouchers can only be used to pay for registered or approved childcare for a qualifying child, and the vouchers are offered in a scheme that is available to all employees. Salary sacrifice is commonly used with this benefit. They only apply to children aged up to 15 years and can be used for boarding school fees, holiday camps and similar, where the conditions are met.

From 6 April 2011, the limit on the amount of exempt income for childcare vouchers, salary sacrifice or salary plus, will be restricted in cases where an employee’s earnings and taxable benefits are liable to tax at the higher or additional rate. Anyone already in the scheme by 5 April 2011 will not be affected by these changes as long as they remain within the scheme. Ensure that your employees and parents are aware of these forthcoming changes.

Bike to work scheme
Where an employer loans a bike and all relevant safety equipment to an employee to use for commuting, it is an exempt benefit. Salary sacrifice has been applied to this scheme and is offered by many providers.

Work-related training
Salary sacrifice schemes can be used for work-related training as long as the training is relevant to the employee’s work duties.

Company cars and parking
Employees and directors provided with a car or van for their private use which is propelled solely by electricity or which cannot produce CO2 under any circumstances when driven will qualify for a nil rate of income tax. The nil rate came into force on 6 April 2010 and applies for five years. Salary sacrifice schemes can be used to offer this tax-free benefit.

Parking for cars and motorcycles at or near the employee’s place of employment is a tax-free benefit. Parking at a station from where an employee then gets a train to work is not.

Lorraine Owens is a tax manager at haysmacintyre.

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