Salary Exchange Scheme
Salary exchange is a contractual agreement between you and your employer, which changes the way you are remunerated to increase the amount of benefits-in-kind you receive, and to reduce your cash earnings.
Employers and employees will save on their National Insurance Contributions (NICs) that would typically have been paid against their salary. However, because of changes to the NICs rates as of April 6 2011, it has become an even more attractive proposition.
Should you agree to the salary exchange, you relinquish your right to receive this additional cash payment for a minimum period of twelve months. Additionally, you need to be aware that it could affect your eligibility for tax credits, your pension contributions, your State pension entitlements and Statutory Maternity Pay.
So, it is not for everyone, but if you choose this option you can increase your net ‘income’ in real terms.
Here are some tips where individuals can convince employers that salary exchange is the right thing to do:
Employer pension contributions as an alternative to pay is one of the most common uses of salary exchange, but not the most efficient substitute that might be chosen. You are saving your personal NICs on the amount of salary exchanged, which is either 12 per cent today, or 2 per cent depending on the NIC bracket you fall into. But you do not save tax because relief would be available if the contributions were paid personally. It is also appealing for your employer though, as it will save them 13.8 per cent NICs. You might expect some or all of this saving to go into your pension as well, because it costs your employer nothing apart from administration.
Your employer might be persuaded that maximising your net ’income’, by using salary exchange to provide non-taxable benefits-in-kind would be good for staff motivation and morale. Childcare vouchers, the payment of the congestion charge for those commuting by company car into a charging zone, and a mobile phone provided for private use by your employer are examples of benefits that would not be subject to either tax or NICs for the employer and employee. The tax you save will depend on your current top rate of tax 20 per cent, 40 per cent or 50 per cent.
“you can increase your net ‘income’ in real terms”
If a benefit-in-kind is taxable, then there is still a reason for both the employer and employee to look at salary exchange. The employer would not make a direct financial saving, but the employee would. So this might be seen as a way of retaining or attracting staff to the company.
Taxable benefits-in-kind not taxed on the basis of cost
The benefit-in-kind available on a company car is set against its value and emissions, this taxable amount might prove to be less than the value you place on the benefit of having a new car. For example, a new car, with a list price of £12,540 which emits 89g/km of CO2, had a taxable benefit charge of £1,630 for 2010/11. If your employer asked you to exchange salary equal to his annual lease costs you might regard the net salary reduction plus tax payable on the car benefit as being a good price to pay for a brand new car. Your employer would save NIC because the taxable car benefit should be less than the salary exchanged.
Roll up of benefit-in-kind employer’s NI
If your employer is providing a benefit-inkind to you the NICs are payable once a year in July, after the P11D, the benefit-inkind form, has been created for the tax year instead of being paid once a month during the year. This would allow your employer to improve cash flow, using those payments that would ordinarily be sent to HMRC for other purposes until the lump sum payment is due.