As a creative business owner you’ll no doubt be looking for the best ways to reward your team and yourself. That will include basic pay but also pensions and possibly other benefits (no we don’t mean the taco night or the office shuffleboard!).
The great news is, a salary sacrifice scheme can mean getting more whilst paying less tax.
What is Salary Sacrifice?
Salary sacrifice is a tax-efficient scheme where pay is swapped for a benefit.
Whilst the word sacrifice often has negative connotations, in this instance there can be a heap of benefits (pun intended).
To be clear, it’s not about giving benefits instead of pay, it’s about giving choice to your team. A chance for you all to be creative with your pay, not just your work.
How Salary Sacrifice works?
Salary sacrifice works by reducing your pay by an amount equal to the benefit you receive.
As your pay decreases, the tax and national insurance calculated on it also decreases, however, the combination of pay and benefit will still amount to the same value as before.
The reduced tax deductions will mean you keep more of your pay than if you had acquired the benefit yourself.
Yes, really. You get the benefit and keep more of your hard earned pay too.
Who can Salary Sacrifice?
Essentially, anyone can take part but only where it’s offered by an employer.
For employees, the reduced salary (after the sacrifice) must remain above the National Minimum Wage. Typically businesses owners escape this restriction but do check first.
(Some schemes like Cyclescheme require all users, including Directors, to be above the Minimum Wage.)
What Salary Sacrifice schemes are available?
There are a number of schemes available but the most common are:
- Season ticket loan
- Cycle to work scheme
- Childcare vouchers (no longer available to new entrants)
- NEW – electric car subscriptions (Can you buy an electric car through your company?)
Does Salary Sacrifice affect my mortgage?
As the scheme contractually reduces your pay, the lower amount will show on your payslips and P60, so yes, taking part may impact mortgage and other loan applications.
Is salary sacrifice good for business owners?
As well as reducing the tax and National Insurance the employee pays, it also reduces the Employers National Insurance, saving the business money. The benefit will be tax deductible for the company and may include VAT that can be reclaimed too. Therefore both the business and the employee win.
These schemes can be a fantastic way for business owners to maximise their earnings but as always, it’s vital to assess your own position and that of your company first. Check out the Four tips to move your business forward this year.
If you’d like to explore further, why not get in touch to arrange a personal tax review to see how you can best extract value from your business and discuss how you can offer benefits to your team.