How does salary sacrifice affect National Insurance Contributions?

what employee-funded benefits mean for PAYe and nic

At its simplest, there are two kinds of employee benefits – employer-funded, and employee-funded.

But if people are paying for benefits themselves, are they really benefits, we hear you ask? Well, yes, they are – because even though they're contributing funds themselves, the salary sacrifice arrangement still offers plenty of support and savings. Plus, salary sacrifice programs - such as a cycle to work scheme - can play an important part in the health and wellbeing of an organisation - meaning happier, healthier employees.

Salary sacrifice means reductions in PAYE tax and National Insurance Contributions for your employees, with potential added NIC reductions for you.

Let's take a look at how it works.

employees save up to 32% on combined paye tax and nic reductions

Salary sacrifice means benefits are paid for out of the pre-tax salary. That means a smaller proportion of the employee's overall salary is lost to tax and NI.

For a basic rate taxpayer, the combined savings are up to 32%. For a top-rate taxpayer, it's generally up to 22%.

If you want to calculate how much your employees could be saving, there are plenty of online calculators available to help.

As a quick example, if someone is earning £25,000 p.a., and sacrificing 10% of their salary (roughly £208 per month) to pay for childcare vouchers, their annual NIC goes down by around £300, from £2,020 to £1,720, while PAYE tax falls from £2,700 to £2,200, saving another £500.

So, the £2,500 annual cost of childcare, a cost that your employee would have been paying anyway, is offset by tax and NI savings of £800. They've effectively knocked their childcare bill down to £1,700. That's a big saving!

EMPLOYEES SAVE UP TO 13.8% on national insurance contributions

Employers don't save quite as much on each individual employee, but those reduced taxable salaries do mean that you save up to 13.8% of an employee's National Insurance Contributions when they're using salary sacrifice schemes.

It doesn't sound like much for a single employee. But when it's multiplied by the hundreds – or even thousands – of people who will want to use childcare vouchers, cycling schemes and car payments, it really does start to add up.

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what else does salary sacrifice impact?

When offering salary sacrifice, there are a few other things you'll have to keep in mind, and may need to talk your employees through.

Tax credits

Something you should know- receiving childcare vouchers through salary sacrifice can have an impact on the tax credits your employees can receive.

This is because parents can only claim tax credits for childcare paid for with their own money – and that doesn't include vouchers. So, although encouraging parents to get childcare vouchers is good news for you, it might not always be good news for them.

Fortunately, these circumstances are rare, and most parents are better off with vouchers – but if you want to check, HMRC provide a useful calculator.

Minimum wage

Minimum wage should also be a consideration for salary sacrifice. As the money sacrificed will lower a minimum wage employee's taxable salary below the minimum threshold, you're technically not paying them a minimum wage anymore.

So, even if it's by their choice – and they’re sacrificing money to pay for childcare at a lower rate, helping their wages stretch further – it's still not allowed. Those are just the rules.

what about deductions made after tax?

At the moment, there are a handful of things that can be paid for through salary sacrifice that will see you get NI and tax reductions – but over the next few years, this is set to change, with the pool of options shrinking down to bikes, low emission cars, childcare and pensions.

Your employees can still use a similar net pay reduction arrangement to pay for things directly out of their salaries, splitting the cost over a longer period – and just about anything can be paid for this way.

However, only approved services receive the tax and NI benefits. You can find out more about the full list of what you can and can't get in our blog on the rules.

Still, even without the savings, these are fantastic benefits to offer employees, helping to improve their ability to pay for things they want, and need. For example, it can be used to split an annual train ticket into 12 monthly payments – which will be cheaper than the monthly ticket bought at the counter.

how do you prepare for your payroll?

A lot of payroll software will let you set up a salary sacrifice arrangement quite easily. In a larger workforce, though, managing and monitoring all of this can be quite the mammoth task.

Working with a salary sacrifice provider can take a great deal of the strain off of your HR and payroll teams, meaning you see the savings without any of the added hassle.

Interested in starting to offer salary sacrifice? Get in touch with us today and we'll be happy to answer any questions you might have!

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