The recent decision by one London law firm to enforce a rule that staff wanting to work from home full time should accept a 20% pay cut was met with some controversy. It will mean that a junior lawyer for example, on a salary of £90,000, will see that figure reduced to £72,000 for the benefit of working from home every day.
Whilst this is a salary sacrifice in return for the benefit of working from home, there are also salary sacrifice schemes that replace the amount sacrificed with something else, in which case the situation is not as bad as it initially sounds. This is because salary sacrifice can reduce a person’s marginal rate of tax whilst providing other benefits.
Given that personal allowances have not been increased and the rate of national insurance contributions (NICs) increased from April 2022, more people have been pushed into higher tax brackets and are paying higher taxes. Anything that can mitigate these effects by reducing gross salary can help to minimise tax rates in real terms.
Understanding how salary sacrifice works
Salary sacrifice is the exchange of salary for a non-cash benefit, for example, pension contributions, childcare vouchers, a cycle to work scheme or a company car.
The advantage of using salary sacrifice as a method of reducing employee’s earnings is that employees can save on tax and NICs and employers can save on employers’ national insurance contributions. Of course, it is necessary to look at whether a tax liability arises on the benefit provided in place of salary.
The best ones to consider in order to reduce tax liabilities are as follows:
- £500 annual allowance for employer funded pensions advice;
- Workplace car parking vouchers;
- Travel season tickets;
- Mobile phones and tablets;
- Childcare vouchers / employer subsidised childcare;
- Higher education e.g. MBA courses;
- Cycle to work schemes;
- Ultra-low emission company cars (below 75g/km emissions);
- Beneficial company loan (up to £10,000).
If you are considering whether or not to introduce a salary sacrifice scheme for your employees, it is worth taking some specialist tax advice beforehand, because every situation is unique.