September 7, 2007 12:03 pm
Many employers will typically reward top-performing staff with an annual bonus. But some are turning to new methods to stretch the rewards year-round, through tax-
efficient benefit schemes.
These schemes give all staff – from the shop floor right up to the boardroom – the chance to make annual savings of thousands of pounds on work-related costs, such as childcare and travel to and from the office.
Can you tell me more about how I can make these savings?
Savings on childcare and travel – such as bus fares, or buying a bicycle to ride to work – can be made if your employer offers them as a workplace benefit. And, unlike some “lifestyle” benefits commonly offered by employers – such as subsidised gym membership or dental cover – the financial benefits on childcare and travel costs are made through savings on national insurance (NI) contributions and income tax – all with the blessing of HM Revenue & Customs (HMRC).
How do these schemes work?
Tax-linked benefits are most commonly offered through a “salary-
sacrifice” scheme. This is where the employee agrees to “sacrifice” a portion of his or her salary in lieu of a non-cash benefit, such as a payment toward childcare costs. The employee only pays income tax and national insurance on what’s left of his or her salary after the “sacrificed” pay is taken out – effectively lowering the tax paid.
Why is it limited to childcare, bicycles and bus travel?
Childcare is a way for the government to extend help to working parents who may not qualify for tax credits. Bicycles for work-use fall under the government’s Green Travel Plan. And help with bus fares, the newest benefit to be offered, exploits a little-known clause in the Transport Act 1985 which allows firms to offer employees tax-free bus travel to work on company buses.
I am a working parent, so how could I benefit?
If you have a child under 15 in approved childcare, you should qualify for childcare vouchers if your employer offers this benefit. Under this scheme, working parents can sacrifice up to £55 per week of their salaries in lieu of ”vouchers” which pay for approved childcare, such as registered nannies, nurseries or after-school clubs. The tax savings for one child can range from £800 a year for basic-rate taxpayers to £1,200 a year for higher-rate payers.
Transport costs take a big chunk of my wage. Can I get help?
If you are prepared to swap the steering wheel for the saddle, you could get a hefty discount on a new bicycle. Under the Bicycle for Work scheme, the employee chooses a bicycle from a retailer, which the employer “buys” and then leases to the employee. The employee then pays an agreed amount each month out of pre-tax earnings, making savings on tax and NI contributions. At the end of the agreement, typically one or three years, the employee has the option to buy the bike for a nominal value. This scheme is most effective for higher-rate payers who could save up to 50 per cent on the cost of a new bicycle. Basic-rate payers can save up to 40 per cent.
What about other types of transport, such as bus, tube or taxis?
A new scheme has just been launched which offers workers commuting on buses the chance to make savings of up to 41 per cent of the cost of an annual bus pass. Under the scheme, employees are given the option to buy an annual bus pass through monthly deductions from their salary. P&MM, the firm which has pioneered the scheme, says a typical higher rate tax payer will save £184.50 on a £450-a-year annual bus pass. There are currently no tax-linked benefits for tube travel.
What about cabs?
For a number of years, the HMRC has given employers tax exemptions on the fares they pay for employees who have to work late. But employers may find it tougher to claim this exemption in the near future as the HMRC has set out stricter guidance on the times it will apply.
I occasionally work from home. Can I get help with the costs of my computer?
Until six months ago, your employer could have offered financial help through the Home Computing Initiative, which gave tax savings on PC purchases. But this was axed by the government in April.
Are there any drawbacks to these schemes?
Yes. Employees signing up to a
salary-sacrifice scheme need to be aware that other benefits could be affected. The “sacrifice” reduces the contractual salary, and this could have a knock-on effect on state pension contributions, and even the basis for overtime calculations and future wage rises. Salary-sacrifice schemes can also be inflexible. For example, childcare vouchers typically lock employees into regular payments for 12 months. The contract can only be broken under specific circumstances, such as the death of a child, redundancy, or divorce.
How can I get my employer to offer these benefits?
Employers aren’t required to offer these benefits, but it’s worth asking your human resources department. Bear in mind that the schemes can take time to implement.
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