A tax efficient benefit is when a benefit is offered through a salary sacrifice arrangement and is exempt from income tax, employer's national insurance (NIC) and employee's national insurance (NI).
In order to do this, the benefit cost is deducted from the employee's gross pay, so less tax and national insurance are due.
Tax efficient benefits are generally restricted to pensions, Cycle to Work (CTW) and Childcare Vouchers (CCV), however, over the past few years there has been an expansion in these offerings to include cars, parking, mobile phones and the purchase of additional annual leave.
At the same time, there has been an expansion in NI-efficient benefits. This is where some benefits have been offered as being able to save on employee and employer NI contributions rather than income tax, to include technology, school fees and healthcare.
Some helpful key terms explained
| Key terms | Definition |
|---|---|
|
Benefit in Kind (BIK) |
This refers to services or benefits an employee receives from an employer in addition to their salary that may require the employee to pay tax on the taxable value of the benefit. |
|
Childcare Vouchers (CCV) |
This is a government-backed scheme that enables employees to save on childcare costs from their gross pay, thus saving on income tax and NI. |
|
Cycle to Work (CTW) |
This is a government-backed salary sacrifice scheme that enables employees to lease bicycles and equipment from their gross pay, thus saving on income tax and NI. Generally, the employee will have the option to purchase the bike at the end of the deduction period. |
|
Employee National Insurance (NI) |
This is a payment that employees make to the government which goes towards funding state benefits such as the state pension and healthcare. Employees start paying when they earn more than £157 per week, and is tiered at 12% for basic rate income tax payers, and an additional 2% for all higher rates. |
|
Employer National Insurance (NIC) |
This is a cost employers incur for their employees, this currently stands at 13.8%. |
|
Gross Pay |
This is the total amount an employee is paid before any income tax, NI or other deductions are made from their salary. |
|
Income Tax |
This is what employees pay to HMRC on all salary above £12,500. It works in a tiered system with 20% basic rate, 40% higher rate, and 45% additional rate - with the more you earn, the more you pay. |
|
Net Pay |
This is the total amount an employee is paid after income tax, NI or other deductions are made from their salary. |
|
Salary Sacrifice |
This is a term used to describe the act of an employee reducing (sacrificing) their salary in order to take a benefit offered by their employer. |
Please note, Reward Gateway are not tax advisors. Further information about employee benefits taxation should be sought from the HMRC or an independent tax advisor.
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