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The basic idea:
The principle of salary sacrifice is
that an employee gives up an element of salary and receives in its place
a benefit in kind. If the benefit in kind is exempt from tax then both
the employer and the employee can gain financially.
For the employee the use of a salary
sacrifice can be a very attractive proposition compared to the
alternative of funding the benefit in kind out of disposable income.
Salary sacrifice arrangements can
have particular relevance in the area of training.
If a student were to try and claim
tax relief for training on their own personal tax return then HMRC take
a very hard line. The legislation concerning tax relief states that
expenditure has to be incurred ‘wholly, exclusively and necessarily in
the performance of one’s duties.’ All three terms are hard to meet and
collectively it becomes almost impossible, HMRC in particular arguing
that expenditure can rarely be necessarily incurred in the performance
of one’s duties. Tax case law over many years only reinforces HMRC’s
standpoint.
Conversely, the rules permitting
employers to meet the training costs directly are very generous. |
How it might work for an MDC student:
Mr A agrees to a reduction in salary
of £6,300 (the cost of the course inc VAT) in return for an employer
paying directly for the MSc programme. The provision of the training is
then a tax-free benefit in kind.
If Mr A pays higher rate tax at 40%
the effective saving to him is £2,569 when personal tax and national
insurance contributions are factored in.
But Mr A’s company gains too. It
will save £1,439 by agreeing to the salary sacrifice.
So the combined saving for a £6,300
programme is a staggering £4,008.
(We have assumed Mr A has a total
salary/bonus package of £48k. If you want precise details about how
this figure is calculated please contact
Evolution LLP whose details
are at the bottom of this page) |
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Getting it right
The ‘sacrifice’ is achieved by
varying the employee’s terms and conditions of employment relating to
the level of pay received.
It is important that salary
sacrifice arrangements are structured correctly and the following
guidance notes explain the areas that need to be considered.
It should be stressed that the
salary has to be given up before it is treated as received for taxation
purposes.
Salary sacrifice is a matter of
employment law and not tax law. HM Revenue & Customs (HMRC) take an
interest in salary sacrifice arrangements to ensure that the overall
remuneration package is correctly dealt with for taxation and National
Insurance Contributions.
This means that the employer has to
provide full details of the existing and proposed new contractual
arrangements to demonstrate that entitlement to cash pay has been
reduced; that a non-cash benefit has been provided by the employer and
that the employer is simply not merely meeting the employee’s own
financial commitment. |
Issues to be wary of:
Where an employee agrees to a salary
sacrifice in return for a non-cash benefit, they are giving up the
contractual right to future cash remuneration. Employers and employees
considering a salary sacrifice arrangement are advised to obtain legal
advice on whether the proposed salary sacrifice arrangement will achieve
the desired result.
The arrangement should specify a
time period during which the salary sacrifice and the provision of the
benefit will apply unless it is intended to be an open-ended benefit
provision.
The scheme will fail if there is a
right to give up the benefit and revert to the higher salary during the
period covered by the arrangement. Otherwise, the arrangement would
normally cease on the agreed date at which point in time there should be
a new and legally enforceable variation to the terms and conditions
included in the contract of employment.
The use of a salary sacrifice
arrangement can impact on areas such as statutory
maternity/paternity/adoption pay; pension contributions; pay increases
and overtime payments; entitlement to holiday pay and the provision of
mortgage references. The legal advice referred to above should include
covering these points and include the possible use of a notional salary
figure for use in determining an increase in pay; calculating overtime
rates; working out entitlement to holiday pay or sick pay and providing
earnings information to a mortgage lender. |
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Other advantages:
The use of a pre-sacrifice cash
salary figure as a notional salary does not invalidate the salary
sacrifice. For example if the value of a remuneration package is £24,000
of which £20,000 is paid in cash and the balance is the subject of the
salary sacrifice. Any increase in pay (eg inflation linked pay rise)
should be based on the value of the package ie £24,000 and that the
increase in pay should be paid monthly in cash.
HMRC appreciate that there may be
exceptional reasons for the salary sacrifice arrangement being changed
before the intended period covered by the arrangement has elapsed. These
are generally ‘lifestyle’ changes such as unforeseen events like the
redundancy of a spouse or partner; pregnancy of the employee or partner;
marriage or divorce of the employee or a close family bereavement where
the employer might agree to revisit the contractual terms. |
Further information:
Contact: Ian Kelly ATT, Client Partner at Evolution LLP,
Ian.Kelly@evolutionllp.com telephone
+44(0)1642 221331
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