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Salary sacrifice: A tax perspective

How to grow benefit packages despite tax changes 

Craig Hughes, a private client tax director at Menzies LLP, suggests a two-tier approach to staff perks could be an ideal solution to employers and employees.

It is no surprise that salary sacrifice schemes have become so widely used by employers and employees alike. They have allowed working people to purchase services they already use in a tax-efficient way, leaving them up to 47 per cent extra in their pocket, whilst companies have had the advantage of paying reduced amounts of National Insurance on workplace perks offered to staff.

How will the changes impact SMEs?

The added financial and administrative burden that these changes will inevitably impose is certain to have a huge effect on SMEs. Where many large companies have specialist software and in-house teams of finance and HR experts to help them assess staff benefits on an employee-by-employee basis, SMEs will potentially have to pay to seek this advice from a third party.

The incoming changes to salary sacrifice schemes are also likely to have an impact on SMEs ability to compete within the UK jobs market. Smaller companies often use benefits packages to attract and retain quality job candidates. To prevent the changes to salary sacrifice schemes having a negative impact on employee turnover, SME’s should think innovatively about alternative ways to introduce flexibility into perks offered to staff. Ideas could include additional holidays and early finishes.

What do employers need to consider?

The scale of the changes will require employees to be fully aware of what impact there is likely to be on their individual financial situations and make informed and timely decisions accordingly. As such, firms may wish to consider ensuring their workforce is clear about what the removal of certain tax perks means for them by bringing in a specialist to present a seminar on the topic.

Adopting a two-tier approach

A two-tier approach is an opportunity for employers to get creative when it comes to offering staff perks. With a two-tier scheme, employers will be able separate those perks that will still receive a tax-saving, such as childcare vouchers and pensions, from those that will lose their tax-free status, such as gym membership, into ‘tier-two perks’. Adopting a two-tier approach, whereby employees can continue to use benefits which are ‘free’ to use, such as childcare vouchers, alongside those incurring a tax liability can be a logical solution.

While staff are unlikely to react positively to news of the changes to salary sacrifice schemes, careful and timely planning by employers can play a significant role in minimising any upset and helping to keep day-to-day business processes running smoothly.

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