Salary sacrifices can be beneficial for not only employees, but also for company finances. Forfeiting salaries for benefits in kind (BIK) can reduce both the amount of tax employees pay and the National Insurance (NI) the company has to pay. However, as with all schemes, the rule does not apply for everyone. Individual financial circumstances ultimately determine the split that should be taken between salary and BIK, if a split is required at all. When the split between pay and BIK is done correctly, the NI and tax reductions can be significant:
Sacrificing a portion of salary for BIK can save anything from 2% to 12% of NI. Plus, the company itself can delay their NI payments due to these only being required annually on BIK, as opposed to monthly.
The tax benefits are slightly more complicated as it is dependent on the type of BIK taken. Although, in general, where the BIK is worth more than the salary given up, the tax bill will be reduced. It is important to note that salary sacrifices cannot only be used for tangible assets, but also for non-taxable perks, such as company pension contributions. Sacrificing a percentage of salary for a pension fund will save the individual tax and NI, as well as NI for the company.
So, who benefits from salary sacrifices?
Salary sacrifices are generally more advantageous to those whose income falls into the higher rate band, either because they receive a high salary, or because they receive a low salary that is topped up with dividends, causing their income to fall into the higher rate band. The latter is most common for company directors and a salary sacrifice in these circumstances can save a substantial amount. For individuals that receive a low salary and dividends, but do not fall into the higher band, a salary sacrifice will not save tax or NI for the individual. However, sacrificing the dividends for a tax-free BIK will save the company tax as they can seek a corporation tax deduction for the BIK, which they can’t do for dividends. Finally, where the remuneration package is simply a low salary, there are no tax or NI benefits for either the individual or the company.
With salary sacrifices there is not one scheme to fit all. It is advisory that companies and individuals review all of the options available to them to ensure they get the most out of their remuneration package.
Find out if salary sacrifices can benefit you