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What is salary sacrifice and how can it save me tax?

4 June 2021
Darren Hughes
Reducing Tax, Payroll, People

Salary sacrifice schemes have been around for many years, but they should not be overlooked because when used as part of an overall remuneration package they can save significant amounts of tax and national insurance for employees and employers.

Case Study

We were recently approached by a new client who had a problem. That’s often the way and sometimes the desire to find a solution to their problem is the first time a taxpayer thinks about using an accountant.

What was the problem?

Our client, Mrs X, was earning a decent salary, but an unexpected bonus (although obviously very welcomed) threatened to push her salary into a higher tax bracket where she would lose her personal allowance. That meant a lot of the bonus would effectively be taxed at 60%!

After discussing with Mrs X various ways to avoid punitive tax on her hard earned bonus, the suggestion that most appealed to her was to ‘sacrifice’ some of the bonus in exchange for a tax-free or tax-advantaged benefit under the salary sacrifice scheme. That works by reducing the taxable salary by the amount agreed to be converted to a benefit, which saves both tax and national insurance for the employee and employers’ national insurance for her employing company.

Our client discussed what options she had through salary sacrifice with her employer, who were more than happy to explore this because not only would it save them money in the form of the national insurance saving mentioned above, but it would also leave them with a satisfied employee.

What did she decide?

Following the discussion Mrs X decided to investigate leasing an electric vehicle. She liked the idea of upgrading the “tired family run around”, and being greener and reducing her carbon footprint was an added bonus. The lease payments made by the company on her behalf would effectively reduce her taxable income, which in turn would reduce her total income to below £100,000. That way she would not lose her entitlement to the personal allowance.

The benefit in kind rates are extremely favourable on new electric vehicles. The car she chose has an electric range in excess of 130 miles per full charge and therefore the benefit in kind will be 1% of the list price for 2021/22 and 2% for the following three years. The only negative to this scenario is that the reimbursement on business mileage is only 4p per mile. There is also an argument that the cost of some electric vehicles is higher compared with the traditional petrol/diesel option.

Ultimately however Mrs X weighed up the pros and cons and felt this was the right decision for her.

What other benefits are included in salary sacrifice?

Electric vehicles are not the only option that are available under salary sacrifice. There is also the cycle to work scheme for any cycling enthusiast, providing an employee with a mobile phone or SIM only, and employee or employer pension contributions.

Who else can benefit from salary sacrifice arrangements?

Salary sacrifice schemes can also be used very effectively to avoid the pension charges where high earners have maxed out on their pension contributions and face expensive tax charges if they or their employers put additional amounts in.

To find out more about how we can help you save tax, save time and create wealth why not contact us to arrange a free initial meeting.

The content in this blog is correct as at 04/06/2021. See terms and conditions.

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