Ask the Expert, with John Dormer, Partner at Wright Hassall and specialist in employee incentives.
All businesses are looking at new ways to save money. John Dormer gives his advice on how ‘salary conversion’ can work for both staff and employer.
The need to manage costs and maintain cash in businesses has never been so acute.
One significant cost for all businesses is tax and national insurance (NI) on salaries and employee benefits. There exists however a very effective saving opportunity relating to these costs through the use of ‘salary conversion’.
In essence, salary conversion involves employees exchanging pay that is fully subject to income tax and NI in return for benefits which are tax and/or NI free or are taxed/subject to NI at lower rates.
The end result is that employees, in many cases, will benefit through increased take-home pay while the business saves employer’s NI - reducing the overall costs of employment.
Salary conversion is viewed by HM Revenue and Customs as acceptable pay structuring. In fact, HMRC is so accepting of the practice that is has outlined how to make such arrangements effective on its website.
Salary conversion can be used with a variety of different benefits, such as pensions, travel, company cars and childcare, and can produce potentially significant savings if there is reasonable take-up.
Many employers are looking at ways of introducing salary conversion arrangements which provide income tax and NI free benefits. The tax and NI savings are then shared (often equally) between the employees and the employer.
For example, an employer that implements a tax and NI free salary conversion arrangement for 250 employees who each convert £1,000 of an average annual salary of £25,000 into tax and NI free benefits could yield a saving of £110,000 per annum. If shared equally with employees, each employee could take home an extra £220 per annum – an equivalent to a 1.3% gross pay rise.
One of the most common conversion arrangements is where a business operates a pension scheme into which employees contribute from salary. By altering the payment mechanics such that the employer contributes directly into the pension scheme, NI savings immediately arise.
For example, if 250 employees each contributed £1,500 of an average salary of £25,000 to a pension scheme, implementing a pensions based salary conversion arrangement could save the business £48,000 per annum, while increasing each employee’s take-home pay by £165 per annum.
It is important to note that these arrangements result in actual cash savings which should arise year on year. After a few years the benefits of salary conversion can therefore become very sizeable.
Implementing any salary conversion arrangement involves managing a variety of different issues including employee relations, human resources, legal, tax and payroll. All of these are however manageable with appropriate planning and professional advice.
Bearing in mind the potential savings for both businesses and their employees and the current economic situation, more and more businesses are likely to be considering whether salary conversion is now right for them.
