Salary sacrifice: businesses must be diligent when implementing schemes

Paul Tooth, general manager at Sage HR & Payroll

Salary sacrifice should be part of an organisation’s armoury but there are some key considerations that firms need to take into account

Nick Clegg’s announcement that measures will be taken in the New Year to improve transparency and curb excessive pay packages for executives has put remuneration firmly under the spotlight. At a time when cost of living has reached unprecedented heights and salary increases have stalled, employees are demanding more support from their employers. It comes as no surprise then that salary sacrifice has shot up the corporate agenda, but if they are to reap the full benefits then businesses must do their due diligence before implementing such schemes.

Back to basics: How earning less can give more

Schemes that give employees the opportunity to forego some of their salary in return for other – often more appealing – non cash benefits, significantly reduces the tax liability for organisations and their employees. By paying for these benefits out of their gross salary, an employee can reduce their liability to income tax and national insurance. In turn, the employer also benefits through lessening its National Insurance responsibility; the savings from which can either be reinvested in other schemes or absorbed back into the company’s P&L.

Tax relief?

Salary sacrifice initiatives provide a route to ‘bump up’ savings that offer substantial benefits in periods of economic instability for employees. Indeed, by entering into a salary sacrifice arrangement that could keep earnings under £100,000, high earning employees will not only significantly reduce their personal tax liability, but can also protect some of their £6,475 personal allowances if they hit ‘the sweet spot’ – earning between £100,000 and £112,950.

Yet while sacrificing salary can unquestionably form part of an effective tax planning strategy, the benefits of salary sacrifice do not extend to everyone, nor will they apply to those earning over £150,000 per annum. This clearly reiterates the need for employers to be vigilant in ensuring any salary sacrifice arrangement is fully compliant with HMRC guidelines and beneficial for both the organisation and its people.

Beyond financial gain

The tax savings offered through salary sacrifice are indisputable, yet the benefits are more than just financial. These schemes are also an effective way of boosting morale among your workforce as they show the business cares about its employees’ remuneration.

Employers need to invest time to educate their people on the benefits and drawbacks associated with salary sacrifice. Not only can this help to drive employee uptake by helping to show how the business has invested in its people, but also gives employees the flexibility to select those tax breaks that will benefit them long-term.

Businesses should also look to invest in payroll software that takes care of PAYE regulation and can accurately track what has been paid against what has been saved. This means firms can track a running total of the tax savings made, and also benefit from administration and calculation efficiencies that will reduce the burden on payroll.

 

 

blog comments powered by Disqus