AMS is a Swindon-based accountancy practice, specialising in supporting SMEs and contractors. In this column, Peter Bromiley, partner at AMS discusses how National Insurance savings can be made on salaries and shared between employee and employer.
‘Salary Sacrifice’ is a mechanism where a formal agreement is made jointly by an employer and employee, to reduce an employee’s salary in return for some other benefit. The point of this arrangement is generally to save National Insurance – and this saving can then be divided between the employer and the employee.
How to do it
Firstly, one needs to seek professional advice from a Financial Advisor – as any salary sacrifice must be carefully set up in order to achieve its aims, and be safe from any HMRC challenge that the sacrifice isn’t genuine.
How savings can be made by sacrificing National Insurance
Example: An employee can agree to sacrifice £100/month of their gross salary in return for the employer paying an extra amount into the employee’s pension fund. The National Insurance saved would typically be £25.80 (12% for the Employee and 13.8% for the Employer). Part of this sum could then be added to the sacrificed £100 (up to £13.80 by the employer and up to £12 by the employee) and invested into the pension fund.
Comparison: If the employee made a personal contribution of £100 into their pension fund, without the salary sacrifice, there could be £25.80 less in the fund. So, there is potentially a big advantage (25.8% of the sacrificed amount) for many employees.
Private health insurance (and other taxable benefits in kind)
Salary can be sacrificed and the employer can pay the premiums. However, from April 2017, Income tax will be due on the value of the benefit and National Insurance would be payable by the employer at 13.8% – although the Employee’s National Insurance (at 12%) is still saved.
An employer offering childcare vouchers can agree a salary sacrifice arrangement which saves an employee income tax, as well as National Insurance – so it’s possibly worth 32% (of the value of the vouchers) to the employee; and 13.8% to the employer.
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