Salary sacrifice – big benefits for employers & employees?

Salary sacrifice – big benefits for employers & employees?

Implementing a salary sacrifice arrangement can save both employers and employees money!

There are savings in the employee’s NIC payable on the salary sacrificed of up to 12% and the employer’s NIC payable on the salary sacrificed of 13.8%.

One of the most important developments affecting the owner-managed business in their capacity as an employer over the next two to three years will be the implementation of auto enrolment.

The smaller business sector with less than 50 employees start the process from 1 June 2015 onwards, with phased staging dates over the subsequent two year period. Employers will seek to minimise the costs and maximise tax relief. Employees, whilst appreciating the need to provide for a pension in retirement, will also seek to do this in a tax ands cost efficient manner.

A salary sacrifice arrangement will be an attractive option to consider in achieving both goals, particularly from October 2018 when the minimum contributions payable by the employer and employee rise to 3% and 5% respectively (based on the qualifying earnings scheme). Whilst the operation of a salary sacrifice arrangement is separate to the automatic enrolment provisions, an employer may run the two processes in parallel when complying with their employer duties.

What is salary sacrifice?

Salary sacrifice arrangements involve a contractual right to cash pay being reduced. For that to happen, two conditions have to be met:

  • The potential future remuneration must be given up and;
  • The true construction of the revised contractual arrangements between employer and employee must be that the employee is entitled to lower cash remuneration and a benefit instead.

Therefore, under auto enrolment, salary sacrifice can be used to meet the full total contribution; providing that active membership of the pension scheme can be achieved without the jobholder having to consent to the salary sacrifice arrangement before they are made active member. It is important to note that salary sacrifice cannot be the only payment method allowed for membership of the pension scheme.

Benefits explained

Salary sacrifice enables both the employer and employee to save money due to reductions in the individual’s gross pay, which is liable to employer and employee National Insurance Contributions (NIC) in exchange for the pension contribution by the employer, which is tax and NIC free.

Therefore, there are savings in:

  • The employee’s NIC payable on the salary sacrificed of up to 12%
  • The employer’s NIC payable on the salary sacrificed of 13.8%

Example

A basic rate employee has a salary of £30,000 (no other remuneration) and surrenders the right to £1,500 (5%) salary in exchange for the employer making a pension contribution of the same amount. If there was no such agreement, the employee choosing to remain in auto enrolment would have net pay, using 2014/15 rates of £22, 155 after £1,200 pension contributions are deducted from net pay. This would be topped up by HMRC with tax relief of £300, so that a total of £1,500 would go into the pension scheme. Through participating in a salary sacrifice arrangement, the new salary is £28,500 with a net pay of £22,335, due to the NIC saving of £180 (£1,500 x 12%) and the employer putting £1,500 into the employee’s pension scheme. Alternatively, the £180 saving can be redirected to the pension scheme, leaving the employee with the same take home pay (£22,155). Additionally, the employer saves 13.8% on the reduced salary, which equals £207.

Important considerations

 
Employers:

The employer should provide full details of the scheme and of the new contractual arrangements. The employer will need to satisfy HMRC that the employee’s entitlement to cash pay has been reduced, that a non-cash benefit has been provided by the employer, and that the employer is not simply meeting the employee’s own financial commitments.

Employees:

When entering a salary sacrifice arrangement to replace part of cash pay with the tax/NIC free benefit, it is essential that employees understand what the sacrifice will mean in practical terms. Employees must carefully consider the effect, or potential effect, that a reduction in their pay may have on:

  • Their ability to borrow money – due to a reduction in ‘top line’ salary
  • Their future right to the original (higher) cash salary
  • Any pension scheme being contributed to
  • Entitlement to Working Tax Credit (WTC) or Child Tax Credit(CTC)
  • Entitlement to State Pension or other benefits such as Statutory Maternity Pay (SMP)

For more information on auto enrolment, sacrifice and all other aspects of wealth management, please click here.

As each individual case is unique, it is essential that both the employer and the employee speak with an advisor before making any decision about salary sacrifice.

Free initial meeting

Natasha Fathers, Director of HWM

Natasha Fathers

Director of Hawsons Wealth Management Limited, Sheffield

0114 229 6557

Martyn Weatherhall completes cycle

Martyn Weatherall completes cycle

Martyn Weatherall, Hawsons’ senior partner has completed the coast to coast charity bike ride challenge, raising money for Weston Park Hospital Cancer Charity.

His 150 mile adventure started in Whitehaven, on the Cumbrian coast early on Friday 18th September and finished in Sunderland on Sunday (21st) evening. Martyn and 13 others, many of whom are also bike novices cycled through the Lake District and up across the Pennines over the course of the 3 days.

Here are two updates posted by Martyn after completing his ride:

“Finished, front wheels dipped in North Sea. Legs in pieces. Big hoorays. It’s been a very tough 3 days but the team held together. Very many thanks again for all your donations to Weston Park charity. Very much appreciated. Thank you, Martyn.”

“Penultimate sign off. This is the most difficult thing I’ve ever done, some of the guys were well prepared, I was less so. The wind was an unusual easterly against us which made it really hard. Thanks for your continued support. Back to desk pushing tomorrow!!”

Martyn has raised over £4,000 in aid of Weston Park Hospital Cancer Charity so far.

If you would like to donate please visit Martyn’s Just Giving page by clicking here. This is where you can also take a look at all of Martyn’s updates before and during the ride.

Martyn cycle

5 reasons why existing businesses should plan

5 reasons why existing businesses should plan

Writing a business plan is one of the most important aspects of business success; not only for start-ups but also for existing businesses too. Every business needs a plan.

Outlined below are 5 reasons why existing businesses should write a business plan.

1. Guide growth

A lot of the time success is influenced by external factors; ones that are out of your control – such as economic trends, competition and in some cases, Mother Nature itself. Planning will not take away these externalities, but what it will do, is enable you to guide your business in the direction you want it to grow.

By setting clear objectives and planning possible contingency plans, you are able to guide the growth of your business and the long-term strategic direction in which it moves. Rather than reacting to external influences as and when they happen, you should have plans in place to keep your business on the right path.

2. Analyse opportunities and threats

One of the biggest benefits in writing a business plan is not producing the document itself, but researching the market and critically analysing your business.

This can help you to determine any possible growth opportunities and highlight any potential threats to your business. How will a new competitor impact your business? What may diversifying your product range mean for your sales?

By setting clear objectives and mapping out your business ideas, you will have a much better understanding of your business, your customers and your strategy moving forward.

A business plan is also a good way of ensuring that everyone has the same ideas for the company moving forward. Are you all on the same page? Is the business heading in the right direction? By sitting down and discussing the business, it will clarify the thinking of all involved and make it easier to make decisions further down the line. This is especially important if you are considering expanding or changing the strategy of the business.

3. Mitigate inefficiencies

As a business begins to grow and set up departments for the different areas of the business e.g. marketing and payroll, it is important to understand the individual operations.

By writing a business plan, you will be able to look at the day-to-day operations of each individual department; see their overheads and the resource allocation, and work out the Return on Investment (ROI) of each area. This will highlight any inefficiency within the different departments; something that may have otherwise gone unnoticed.

4. Raising finance

The need for additional finance can arise on a number of occasions during a business’ life cycle.

If you need to raise finance, no bank manager will lend you money without a considered plan. Even if you are pitching the idea to venture capitalists and business angels, it is essential you have a clear understanding of your business, and crucially, its financial projections.

Before lending you money, any potential investor will want a detailed breakdown of your business, the market it operates in and your forecasted profits for the forthcoming 3-5 years.

A business plan will also help you to determine what finance is required and how any additional finance will be spent. Any potential investors will expect you to know where any additional funds are likely to be spent and why.

5. Recruitment process

As well as using the business plan to attract potential investors, you can also use it to attract the best employees. If you want to hire the most gifted members of staff, it may be a good idea to show them your plan and how the business is projected to develop over the next few years. Not only will they be impressed by the company projections, but also by your knowledge and hard work.

Thinking internally, having a solid business plan will also help determine whether you have the necessary resources to take on new staff – how this may impact profits and what you can afford to pay. This can be particularly important if you are considering expanding and growing the business.

Salary sacrifice – big benefits for employers & employees?

As National Minimum Wage rises, so do the penalties

As National Minimum Wage rises, so do the penalties

What happens if I don’t pay National Minimum Wage (NMW)? Here we highlight the employer requirements to ensure you don’t face any of the new Government penalties.

The NMW is a minimum amount per hour that most workers in the UK are entitled to be paid. The Government has approved a rise in NMW, with more than one million people set to see their pay rise by as much as £355 a year from 1 October 2014.

The increases are as follows:

  • The main rate for workers aged 21 and over will increase to £6.50 (currently £6.31)
  • The 18-20 rate will increase to £5.13 (currently £5.03)
  • The 16-17 rate for workers above school leaving age but under 18 will increase to £3.79 (currently £3.72)
  • The apprentice rate will increase to £2.73 (currently £2.68)
No Excuses

Penalties may be levied on employers where HMRC believe underpayments have occurred. The potential penalties have increased from1 February 2014, with HMRC now having the power to not only impose new financial penalties, but also to ‘name and shame’ non-compliant employers.

Employers who fail to pay their employees the NMW can now face increased financial penalties of up to 4 times as much as before. The maximum penalty is £20,000.

The Government also plans to impose further penalties on employers who fail to comply with NMW with more than one employee. The £20,000 maximum penalty is therefore applied to each individual case where the employer has failed to comply with NMW. This will mean that if an employer underpays 10 employees, the employer could face penalties of up to £200,000.

The revised regime now means that any employer not meeting NMW requirements can be named. In June 2014, a further 25 employers were ‘named and shamed’ in an article released by the Government. One named employer owed as little as £124.35 per employee.

More from our payroll experts

You can find all of our latest payroll articles here.

If you are looking for advice in a particular area, please get in touch with your usual Hawsons contact.

Alternatively, you can request a free initial payroll quote online here.

Stephen Charles partner

Stephen Charles is a tax partner at the firm, specialising in corporate and business taxation. For more details and advice, please contact Stephen on [email protected] or 0114 266 7141.[/author_info]

VAT for digital business and ‘Mini One Stop Shop’ (MOSS)

VAT for digital business and ‘Mini One Stop Shop’ (MOSS)

VAT for digital business and ‘Mini One Stop Shop’ (MOSS)

The one-stop VAT service starts from 1 January 2015 for businesses supplying what are collectively known as ‘digital services’ in the EU. The effect of the measures are that a business will not have to account and pay VAT separately in each country where they do business which would otherwise be the case following a change in the place of supply rule.

Digital services essentially means broadcasting, telecoms and e-services including those selling apps, e-books, streaming services (e.g. sports/film/tv/music), dating services and journals, newspapers and magazines that are subscribed to electronically and smartphone games.

Change of place of supply

From 1 January 2015 the place of supply for VAT purposes for a EU business selling digital services will change. Currently, intra-EU supplies of digital services to non-business customers are subject to VAT in the member state where the supplier belongs.

From 1 January 2015 this changes, so that the VAT is due where the customer who receives the service lives or is located. This will ensure that UK consumers of these services will pay UK VAT no matter where the supplier of those services belongs.

In order that UK businesses supplying digital services do not have to register for VAT in every EU member state where they have customers, an optional VAT ‘Mini One Stop Shop’ (MOSS) online service has been set up by HMRC. Other EU member states will be building their own systems.

Sally Beggs, Deputy Director Indirect Tax, HMRC, said:

‘The VAT MOSS will save digital services suppliers from having to register for VAT in every Member State where they do business, removing a significant administrative burden. Businesses with their main operation or headquarters in the UK will register with HMRC to use the service.’

Businesses will be able to register for VAT MOSS from 20 October 2014. The service will be available to use from 1 January 2015.

More from our tax experts

You can find all of our latest tax articles and tax resources here.

If you are looking for advice in a particular area, please get in touch with your usual Hawsons contact.

Alternatively, we offer all new clients a free initial meeting to have a discussion about their own personal circumstances – find out more or book your free initial meeting here. We have offices in Sheffield, Doncaster and Northampton.