Salary Sacrifice – Tax Advantages
Having children is all about sacrifice. I’m not just talking about your salary going on nappies and formula. Gone are the days when I could do what I wanted, when I wanted. Although to be honest even then I had to get permission from Mrs TTF first.
I have an email alert set up to inform me when a snow dump has occurred in the French ski resorts of the three valleys. This used to be a welcome entry to my inbox as I could book a late flight to Geneva and be on the slopes that weekend. Now the email alert just reminds me that the only dumps I will be seeing this weekend will be in a potty. Sorry already addressed potty training so I won’t revisit.
The once exotic holidays to Egypt, Australia, Peru are all a distance memory. This year’s trip to the Isle of Wight will be a great family holiday but Paddington Bear will be the only Peruvian in sight. I doubt that exotic dishes such as roasted guinea pig (the eye balls were especially succulent) will be on the menu at the needles pleasure park but I could be wrong.
I have even had to make sacrifices in respect of the car that I drive…..well not the actual car but one of the back bucket seats is taken up with a child car seat. When you only have four this is a major disadvantage when offering lifts.
The sacrifice is worth it (most of the time) but could sacrificing something else be beneficial from a tax perspective?
THE TAX BIT – SALARY SACRIFICE
It is usual for an employee to receive their remuneration as straight forward cash. But it is possible to receive remuneration in other forms. This could include provision of private medical insurance, child care vouchers or pension payments.
The benefits are taxed on the employee based on the marginal cost to the employer or in certain cases based on specific benefit rules. There are however some benefits that are tax free. If you are therefore already spending your salary on the following then it would be beneficial to approach your employer to arrange a salary sacrifice:
If the salary sacrifice is carried out correctly then you will need to contractually reduce your cash salary in return for the benefit. The element of pay that you have sacrificed will instead be received in the form of a tax free benefit. The following conditions must be met to execute an effective salary sacrifice:
• the employment contract must be effectively varied before the changes are implemented. Any right to receive cash wages/salary must be given up before the employee is entitled to receive the remuneration.
• the true construction of the revised contractual arrangement between employer and employee must be that the employee is entitled to lower cash remuneration and a benefit.
It is therefore important that the new contract is reviewed by an employment specialist to ensure that both parties are protected following the salary sacrifice.
Why would your employer do this for you? Well they will also save employers national insurance at the rate of 13.8% on any qualifying benefit. If a number of employees were to agree then considerable savings could arise for them as well as the employees.
Why not mention this to your employer, it might win you an award and make you popular with your work colleagues!