Understanding The UK Salary Sacrifice Scheme
A Salary Sacrifice Scheme in the UK is an employee benefit option where workers can exchange a portion of their monetary salary for non-monetary benefits. This arrangement is recognised by the HM Revenue and Customs (HMRC) as a modification of the employee’s pay structure, predominantly for obtaining non-cash benefits.
Mechanism of Operation
This arrangement involves an agreement between the employer and employee, where the latter agrees to forego a part of their salary in exchange for certain equivalent benefits. This leads to the employer providing specific benefits directly, with the cost being deducted from the employee’s salary. Such deductions are accounted for before calculating income tax and national insurance contributions.
Objective of Salary Sacrifice Schemes
The primary goal of these schemes is to facilitate tax and national insurance contribution savings for both the employer and employee. Benefits obtained through salary reduction are taxed only on the reduced salary amount, not the benefits received.
Consider an employee earning £350 weekly who agrees to a £50 salary reduction for childcare vouchers. If these vouchers are tax and national insurance exempt up to £55, then the tax and contributions are calculated at £300 instead of £350.
It’s crucial to note that not all non-cash benefits are exempt from the tax and national insurance contributions. Additionally, a salary sacrifice should not reduce an employee’s earnings below the National Minimum Wage.
Exemptions from Tax and National Insurance
Certain schemes, like pension salary sacrifices, cycle-to-work programs, electric vehicle schemes, and workplace nurseries, offer tax and national insurance benefits. However, not all benefits are eligible for these exemptions.
Restrictions on Benefits
From April 2017, the UK government imposed limitations on eligible benefits, excluding options like mobile phones and gym memberships from these schemes.
Impact of OpRA Rules on UK Salary Sacrifice Schemes
Application of OpRA(Optional Remuneration Arrangements) Rules
Type A Arrangement
Here, an employee gives up the right to a portion of their salary for a benefit, like a gym membership or a company car.
Type B Arrangement
The employee chooses a benefit instead of a portion of their salary, such as opting for a company car over a cash allowance.
Working of OpRA Rules
Tax is calculated on the higher of the cash amount foregone or the taxable benefit amount under normal rules.
Example: If an employee forgoes £350 in salary for a gym membership costing £300, the taxable benefit is the higher amount (£350).
You should Consider:
If an employer withdraws the cash option and solely provides a benefit like a gym membership, the tax is based on the cost of the benefit (£300 in this case) as it’s no longer under optional remuneration arrangements.
As you consider the impact of OpRA rules on UK Salary Sacrifice Schemes, remember that navigating payroll intricacies requires expertise. Our team of Payroll Accountants is here to guide you through these nuances. Let us help you optimise your payroll processes effortlessly, ensuring compliance and employee satisfaction.
Exempt and Non-Exempt Benefits
Salary sacrificed for exempt benefits (like a mobile phone) is taxed on the salary foregone, as the benefit’s normal taxable amount is zero.
Certain benefits, including employer-provided pensions, childcare, and ultra-low emission cars, are excluded from OpRA rules.
The impact of OpRA is null if the salary sacrificed does not exceed the taxable benefit.
Flexible benefit schemes can still offer advantages through employer discounts on benefits like gym memberships or insurance.
Benefit negotiations should be carefully managed to avoid inadvertently triggering disadvantageous OpRA implications.
Employers need to be aware of potential increased Class 1A NIC charges on the cash equivalent of benefits compared to Class 1 NICs on the salary foregone.
Salary sacrifice schemes in the UK are mutually beneficial for employers and employees. They allow employees to reduce tax liabilities and enhance take-home pay while availing of various benefits. Employers benefit by streamlining payroll processes and offering attractive benefits, thereby improving employee satisfaction and potentially reducing their own national insurance.
Jibran Qureshi FCCA is the Managing Director of Clear House Accountants and has over 13 years of experience in practice across multiple industries. Jibran’s educational background includes a Master’s in Financial Strategy from Oxford University and an Executive MBA from Hult International Business School. His experience in Financial Strategy, Tax Planning, Operational Consultancy and Performance Reporting guide his cognizant approach to leading Clear House and its clients to the future. This dexterity led him to be Enterprise Nation’s Top 50 Advisors. Jibran recognised the need to manage the innovative disruptions sustainably early on and shaped Clear House Accountants not just to be compliance specialists but advisors who help build complex ecosystems around cloud accounting software, provide advice on funding support, help manage innovative tax schemes, set up and implement complex strategic plans, and much more. So, his clients can thrive, not just survive.
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