Salary sacrifice can reduce your personal tax bill and save your business NI contributions. But the amount of tax that can be saved varies widely. How can you get the best result?
What is a salary sacrifice scheme?
Salary sacrifice essentially involves an employee giving up a portion of their salary in return for receiving a benefit in kind (“BIK”). There are no restrictions on what BIKs can be provided by an employer but the tax implications will vary depending on two crucial points; whether the BIK is taxable and your total earnings.
Non-taxable BIKs – the no brainer!
Sacrificing a portion of your salary for non-taxable perks is clearly a sensible decision. An obvious example is company-paid pension contributions. You will individually save the tax and employee’s NI you would otherwise have paid on the equivalent salary, and your business will save employer’s NI contributions.
Here’s an example…
Let’s say you are a higher rate tax payer, who decides to exchange £1,000 of your salary for £1,000 worth of pension contributions into your pension pot. You would save £420 in income tax and NI, whilst your employer would save a further £138. A total saving of £558, on a payment of £1,000.
But are taxable BIKs worth it?
Okay, I hear you say, but what about taxable BIKs? Well, yes.
Taxable BIKs, such as private medical insurance, will still save national insurance contributions (but not income tax). What’s more, BIKs also improve the business’ cash flow, as the NI is not payable until July following the end of the tax year.
Some tips to steer you in the right direction…
So now that you understand the tax savings and cash flow benefits of using salary sacrifice schemes, here are some pointers to get you started.
- Consider BIKs where the value is worth more you than the tax you’ll have to pay (such as a low emission car).
- If you are currently extracting dividends from your company and are a higher rate tax payer, then reducing dividends and replacing them with BIKs, as it will also help to reduce your company’s corporation tax bill.
- Seek expert advice. An experienced accountant should be well placed to suggest ways in which you can use salary sacrifice schemes to reduce your tax bill.
Tough question: Are you making maximum use of salary sacrifice schemes?
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