Unlike recent fiscal events, this Autumn Statement largely focused on those on lower incomes, with an absence of measures specifically aimed at higher and additional rate…
WHAT IS A SALARY EXCHANGE?
Under a salary exchange (also known as salary sacrifice) the employee gives up an amount of salary in return for an employer provided benefit. Tax and national insurance contribution (NIC) savings result from the benefit being exempt from tax and NIC, or incurring a lower charge than the amount of salary given up. Tax efficient salary exchange schemes can only cover pension contributions, ultra-low emission cars, cycle to work schemes and pre-existing childcare vouchers arrangements. For employers, pension contributions and low emission cars are likely to be the most attractive salary exchange benefits to offer to their workforce.
WHY CONSIDER A SALARY EXCHANGE BENEFITS SCHEME FOR EMPLOYEES?
A benefits scheme that gives employees a choice in tailoring their benefits package can be a cost effective way of incentivising and rewarding staff; ultimately aiding staff retention, engagement and recruitment.
PKF Francis Clark has a comprehensive employee benefit offering and can provide a wide range of help and expertise in the design, implementation and compliance of any scheme. Salary exchange benefits play an important part in the mix, not least because they represent no cost to the employer and in fact the employer saves national insurance, and in the case of electric cars, business mileage costs too.
Employer provided pension contributions are exempt from tax (ignoring any annual or lifetime allowance restrictions), NIC and the apprenticeship levy – for those that currently pay it.
Example: An employer introduces a salary exchange pension scheme to 50 basic rate employees, who currently contribute £1,500 per annum, the annual saving to the employer and employee would be:
|Pension Contribution||50 x £1,500||£75,000||£1,500|
|Employee NIC Saving||@ 12%||£180|
|Employer NIC Saving||@ 13.8%||£10,350|
The larger the pension contributions, the larger the savings generated. However, even if the employee pension contributions are relatively low, at say £50 per month, the savings to the employer (example above) would still be in excess of £4,000 per year.
LOW EMISSION COMPANY CARS
Salary exchange for low emission company cars result in significant savings for the employer. The low benefit in kind charge (fixed at 2% until April 2025, and then increasing by 1% each year until 2028) reduces employer NIC costs and employers can make significant savings on business mileage expense reimbursement costs.
The HMRC approved rate of reimbursement for employer provided electric cars is 9p per mile, compared to 45p per mile up to 10,000 miles and 25p thereafter for privately owned cars.
Example: an employer provides an electric car salary exchange scheme to five basic rate employees, who exchange £350 of salary per month (usually equal to the car lease cost) in return for an electric car with a list price of £35,000. The employees drive an average of 7,000 miles per year in business journeys.
The annual saving to the employer and employee would be:
|Year – benefit in kind %||2023/24 (and 2024/25) – 2%||2025/26 – 3%||2026/27 – 4%|
|Total annual savings||£15,365||£1,204||£15,123||£1,134||£14,882||£1,064|
The above saving is based on employees using a modestly priced electric car. If employees are looking to exchange larger amounts of salary for more expensive cars, or are undertaking higher levels of business mileage, the savings will be greater.
CYCLE TO WORK SCHEME
Cycle to work schemes are a government-backed initiative that aims to encourage more people to cycle to work by making it more affordable. The scheme allows employees to purchase a bike, and any associated equipment, through their employer.
Since HMRC removed the £1,000 cap on cycle to work salary exchange scheme, it has allowed an employer to include electric bikes under salary exchange. We recommend reading our article on the cycle to work scheme for more information.
MAKING THE SALARY EXCHANGE SCHEMES TAX EFFECTIVE
HMRC has strict requirements for a salary exchange to be effective for tax. HMRC will not give advance clearance for a salary exchange arrangement. However, they will give a post-implementation assurance check and sign off. This is an excellent way of obtaining certainty on the tax consequences of the salary exchange. HMRC will request to see a range of documentation before giving clearance. This could include the legal documents, employee communication documentation, website literature, the company car policy, employee handbook alongside other HR and payroll processes.
This supporting documentation is very important; we have seen examples where HMRC decisions have been based, in part at least, on how a scheme was described in the employee handbook. Varying employment contracts requires legal input. We can work with your legal advisers to ensure the documents needed are likely to be accepted by HMRC as being effective for tax purposes.
National minimum wage: A salary exchange involves giving up some employment income. The replacement benefit does not count for national minimum wage and employees cannot agree to be paid less than the applicable minimum wage. So, implementing a salary exchange arrangement for lower paid staff requires caution.
Communication: Salary exchange can impact employees in areas such as pension allowances, state benefits, student loan repayments and qualifying for mortgages and loans. Communicating the benefits and risks to employees is a crucial part of the process. In our experience, the better the communication to employees, the higher the employee take up. Therefore, the higher the employer savings.
Scheme design: Employers can choose to run the scheme as an employee ‘opt in’ or ‘opt out’ approach. Each has its own benefits and the route will be bespoke to the requirements of the employer. Employers may decide to share the savings with the employee. If so, we can advise on how best to split the saving to meet the employer’s objectives.
HOW WE CAN HELP
PKF Francis Clark provides support at all stages of salary exchange implementation covering five distinct phases:
- Scheme design
- Documentation drafting
- Employee communications
- Updating HR and payroll processes
- Payslips and obtaining clearance from HMRC