Salary sacrifice for Umbrella Workers
Salary sacrifice is where an Umbrella worker exchanges part of their gross income pay, to receive remuneration in another form more suited to their needs, such as higher employer contributions to a pension scheme, or to pay back the purchase of a cycle used for the Cycle to Work scheme.
On your payslip this becomes another deduction from your Departmental Costs, which reduces the amount available for your gross earnings. Salary sacrifice is appealing because no employers NIC, employees NIC, or PAYE deductions are applied to the amount that is “sacrificed”, making this a very tax efficient way of (a) contributing to your Pension, or (b) paying of a cycle as part of the Cycle to Work scheme.
How does it work?
Lets say your Timesheet income is £1,250 per week, and you pay into your Pension with 3% employers and 5% employees contributions. In a normal payweek (a) your gross income will be £1,079, (b) your net pay after tax will be £768, and (c) your total pension contributions will be £68. Total funds “paid” to you will be £768 + £68 = £836.
Now, if after speaking to the team at No Worries Umbrella you decide that you wanted to contribute 10% employers pension contributions by way of salary sacrifice. Now your pay figures would change to (a) gross income will be £1,027, (b) your net pay after tax will be £738, and (c) your total pension contributions will be £127. Total funds “paid” to you now will be £738 + £127 = £865.
So by simply setting up a salary sacrifice arrangement for your Pension, you will be saving £29 per week in tax.
The downsides
You will notice in the scenario above your gross income drops from £1,079 to £1,027 per week. It is important to recognise this because;
(a) There will be lower borrowing available on mortgages (since the borrowing level is often determined by a multiple of gross income).
(b) Entitlement to state benefits eg Statutory Maternity Pay and the State Pension may be affected if your gross income falls below the level at which you pay National Insurance contributions (we don’t expect this would affect any of our workers, but it worth mentioning. You’ll be affected your weekly gross income drops below £120 per week.
(c) Overall, your pay must exceed the National Minimum Wage, so there is a cap on how much of your Timesheet income can be entered into a salary sacrifice arrangement.
About Salary Sacrifice
Salary sacrifice is where an employee switches out part of their cash pay, to receive remuneration in another form more suited to their needs.
Changes made by the Government to salary sacrifice schemes from April 2017, meant that most common schemes lost their tax-free status such as: Work related training, Car parking near the workplace, Health screening checks, Mobiles phones, computers and other technology, and Gym memberships.
This change from 6 April 2017, meant Income Tax and NICs advantages where benefits are provided through arrangements in which the employee gives up the right to an amount of earnings in return for a benefit were largely withdrawn. There are however still a small number of exemptions where the Umbrella worker can gain a tax advantage from a salary sacrifice arrangement.
Under a salary sacrifice arrangement, the total value of the gross remuneration, and cost to No Worries Umbrella, remains unchanged. However, depending on the employee’s income level, the net remuneration will increase (when combining the payslip with the value of the sacrificed salary) because of the different tax treatment for some income bands.
The savings to be made depends on what rate of tax the worker pays and how much of their salary they are sacrificing. The salary sacrifice arrangement for Umbrella workers however is unique because their Timesheet income also funds the employers national insurance contribution. As a result, a new salary sacrifice arrangement will save the Umbrella worker from employers NIC, employees NIC, and PAYE.
For an Umbrella worker paying tax at the basic rate for example (annual gross income up to £50,270) if they salary sacrifice £100 of their earnings toward the cycle to work scheme, they can save £16 in income tax and £22 in national insurance contributions (both employers and employees NIC), giving an overall tax saving of £38. For a higher rate taxpayer (charged at 40%) they can save £35 in income tax and £14 in national insurance contributions giving an even higher overall tax saving.
Have a question?
Come in and see us, or give us a call. We would love to discuss what you’re after and how we can help!