Employee benefits: salary sacrifice strategy

Taxes on employment income account for a significant element of the Exchequer’s
annual revenues. The Treasury has forecasted it will receive £265bn of revenue from income tax and National Insurance contributions in the current tax year of which the vast majority will stem from payroll taxes ­ more than four times what it expects from corporation tax.

No wonder that in a recent KPMG survey of major global companies, 74% of employers stated that ‘people’ represented the area where their costs were expected to grow the most in the next three years.

So we developed a suite of strategies to help employers manage this liability. These employment tax cost savings are built around the principle of salary sacrifice.

Salary sacrifice is a relatively simple concept ­ an employee accepts a reduction in their taxable pay in return for an equivalent benefit or expense payment that has a lower tax and/or national insurance contribution (NIC) liability.

Overall the employee will be no worse off, and many if not all should benefit.

Importantly the employer gains because less tax and/or NIC is paid overall.
While salary sacrifice as a concept is straightforward, the devil will always be in the detail. Employers may need to consider tax, NIC, employment law, commercial law and of course employee relations.

It can be the case that those approaching the concept in a piecemeal fashion will find
them more expensive to run as a whole, than the benefits for the company.
Our research suggests that in cost-saving initiatives employers typically achieve only 59% of planned savings. So implementation and accurate identification of what cost savings are actually available are clearly key.

The best approach is to work closely with your adviser to first identify the potential to make savings, and then ensure that you can measure that 100% of the planned saving is then achieved.

Your first step may be to undergo an information-gathering exercise to make sure that you have all the details needed to pinpoint and then track the areas where savings are available. We have a questionnaire that we use for this process and find that this approach works well.

The beauty of these cost-saving methods is that it is a win-win for the employees and the employer. The staff still receive the same benefits they had before ­ indeed often better ­ and the company is better off.

And the savings can be dramatic. The example below produces savings of £2.8m for ABC Ltd ­ equivalent to £560 per employee!

So what should a company looking to save costs do next? Not all these salary sacrifice arrangements work for everyone ­ but some may. Before making other cuts that will directly affect staff, it is worth assessing whether any of these ‘painless’ arrangements are suitable.

Harvey Perkins is director in the people services team at KPMG in the UK