BeeHive > BeeLines > Salary Sacrifice II – Child Tax Credits
Salary Sacrifice II – Child Tax Credits
Well, and to start with I guess, the BeeLine I put out at the end of July on salary sacrifice really got the BeeHive inbox humming. I really like it when that happens, it shows someone’s reading all this stuff if nothing else. But there was some great information contained in the e-mails as well as some awkward questions that led me and our team of legal eagles to dig out some more hard-to-get information from the Revenue types. So that’s what this BeeLine is all about – a kind of sequel if you like.
Because of that, though, anyone reading this follow-up who hasn’t read what is now to be relegated to being merely Part 1 might like to follow this link to read the last BeeLine on salary sacrifice.
Done that? Good! Awkward questions first. The thing that knocked a few of you off of your chairs while reading the BeeLine was the fact that people sacrificing salary of more than £5,000 per annum are required to inform their Local Inspector of Taxes about it. Now I’d picked that up while researching the BeeLine and it raised two major issues with people:
- Does the £5,000 limit apply to flex benefit schemes as a whole, or just each individual benefit?
- Does the requirement to tell the local tax inspector apply if the ‘scheme’ is a personal pension (PP) or grouped personal pension (GPP)?
These turned out to be good questions and were quite hard to get good answers to. But I think we got there in the end. To take the second one first our technical researchers had conflicting answers to the question of whether the requirement applied to GPPs and PPs, so they went straight to the top of the Revenue tree for a definitive answer. I am now sure that the requirement only applies to people in occupational pension schemes and not personal pension arrangements. So, and to avoid any doubt, the position is that where you have a salary sacrifice involving Personal Pensions there is no need to inform the Local Inspector of Taxes. Any employer who has an Occupational Pension Scheme involving salary sacrifice still has to inform their Local Inspector of Taxes of any salary sacrifice of £5,000 or more. So, like many of you I’ve learned something new there, but I have to say that it just didn’t jump off the page at me when I was doing my research for the mega-BeeLine a few weeks ago. I’m glad that’s cleared up though and many thanks to those of you who wrote in to point out that there was contradictory stuff doing the rounds on this topic. Great teamwork is what interactive blogs like the BeeHive are all about. It’s not a one-way street.
Now, the first question turned out to be a real humdinger, especially as so-called flex benefit schemes are all the rage these days and I’m thankful to my right-hand man, Jamie Clark, for giving up a week of his life to dig out some definitive stuff on the whole thing so I could have a stab at this follow-up. Looking at it now I probably should have gone into all this while I was writing the first BeeLine, but I guess I’d still be writing the very first BeeLine of all now if I took that attitude all the time. I mean you’d never get to the end of any pension topic would you? Anyway 'flex benefit' schemes are generally treated as 'benefits in kind' so in that way they're different from salary sacrifice which is specifically not treated as a benefit in kind as long as HM Revenue & Customs deem it to be 'effective'. (To be effective, the salary needs to be given up before the period to which it relates, must be evidenced properly etc). The salary sacrifice is simply treated as an employer contribution and therefore non-taxable and non-NI-able (if there’s such a word. And, to be honest, even if there isn’t there should be. National Insurance is going to grow and grow in future – take my word for it!).
The type of benefit provided will determine its treatment for NI/tax purposes. Jamie did a Google search and found the following (easier than copying out of the tax books we have). I can't guarantee that this is an exhaustive list, but it’ll do until Part 3 I guess:
Benefits taxable on all employees:
- unapproved share option schemes
- non cash vouchers (e.g. luncheon vouchers)
- living accommodation
- PAYE due on non-cash items (e.g. cash vouchers).
Benefits taxable on employees earning over £8,500 per year and directors:
- company cars available for private use
- vans available for private use
- interest free and low interest loans (applies to balances over £5,000)
- certain scholarships
- gift/loan of assets from employer
- private medical insurance.
Benefits not normally taxable on employees:
- free or subsidised canteen meals if made available to all employees
- car parking spaces at or near work
- certain home to work travel expenses
- specified removal and relocation expenses up to £8,000 per move
- certain workplace nurseries
- living accommodation in specific circumstances
- training courses
- Christmas parties and similar functions within set monetary limits
- long service awards
- awards under staff suggestion schemes (up to a maximum of £5,000)
- certain sports facilities
- employer's contributions to an approved or statutory pension scheme (salary sacrifice falls within this, hence the emboldening of the text)
- membership fees and subscriptions paid to approved professional bodies
- routine health checks and medical screening
- protective clothing necessary for job, or a recognisable uniform required to be worn
- small personal expenses paid by your employer when away overnight on business (max £5 per night, £10 outside the UK)
- gifts and goods from business contacts costing up to £150.
More in-depth info can be found here:
Practical advice for business - Taxable benefits
...and here - for pensioners:
Benefits in kind provided by your employer - Pensioners
...and here - for PAYE earners:
Benefits in kind - PAYE earners
...and just to go into complete overkill mode, a 104 page toner-hungry booklet from the Revenue can be found elsewhere on the wibbly-wobbly-web by clicking on the following link.
Expenses and Benefits - A Guide 480(2005)
Now, that’s your e-mails out of the way, but what I really wanted to write about in this BeeLine was the way Child Tax Credits work. (You may even have gathered that from the title of this extended BeeLine and the e-mail we sent out to update registered BeeHive users.) You’ll recall that in the salary sacrifice stuff a few weeks ago I touched on the tricky subject of Child Tax Credits and I am very grateful to Derek Guyers who wrote in to share with us some extensive work he did on this a year or so ago. I’m including some of the examples that Derek showed me here in this BeeLine (but I have updated them so that the figures are for this tax year). I think you’ll be as surprised as I was when I first saw them and they will give you a much better insight than any dry textbooks would into why it is important for people to take these things into account when engaging in financial planning exercises like salary sacrifice.
The first thing that hit me when I saw Derek’s worked examples was how high up the earnings scale this credit business goes. The examples I’ve included here demonstrate the level of change to the credits payable that can be made as a by-product of a salary sacrifice decision. It’s worth pointing out I think that the actual payment of Child Tax Credit is itself fairly complex as it is always based on a person’s, or couple’s, earnings from the previous year to payment anyway. In that way it’s likely to be out of synch with what people are earning in the current year and that too is a further complication to be aware of if you’re ever talking to people about it.
The tables here show the pre and post figures where salary sacrifice takes place and you’ll also be interested to see how the numbers change when a combination of tax credits and housing benefit comes into play:
Increased Child Tax Credit
Husband and Wife both aged 35
Children aged 7 and 4
The post figure assumes a 5% salary sacrifice pension contribution
No other Social Security Benefits apart from Child Benefit
| | Pre- | Post- |
|---|---|---|
| His earnings | £18,000 | £17,100 |
| Her Earnings | nil | nil |
| Child Tax Credit | £2,026.79 | £2,245.75 |
| His earnings | £18,000 | £17,100 |
|---|---|---|
| Her Earnings (part-time) | £5,000 | £5,000 |
| Child Tax Credit | £810.35 | £1,029.31 |
| His earnings | £25,000 | £23,750 |
|---|---|---|
| Her Earnings | nil | nil |
| Child Tax Credit | £360.00 | £627.89 |
But it doesn’t always work:-
| His earnings | £25,000 | £23,750 |
|---|---|---|
| Her Earnings (part-time) | £5,000 | £5,000 |
| Child Tax Credit | £360.00 | £360.00 |
(Figures taken from HM Revenue and Custom's Tax Credit Calculator 9/8/05)
Interaction of Child Tax Credit with Housing Benefit
Assumptions
Husband and Wife both aged 35
Children aged 7 and 4
The pre figure assumes a 5% pension contribution paid from net pay and the post figure assumes a 5% salary sacrifice pension contribution to a personal pension
Rent £130 per week, Council Tax £822.72 per year
No other Social Security Benefits apart from Child Benefit, no savings
| His earnings | £18,000 | £17,100 |
|---|---|---|
| Her Earnings | nil | nil |
| Child Tax Credit | £2,026.79 | £2,245.75 |
| Housing Benefit* | £2,258.88 | £2,508.48 |
| His earnings | £18,000 | £17,100 |
|---|---|---|
| Her Earnings (part-time) | £5,000 | £5,000 |
| Child Tax Credit | £810.35 | £1,029.31 |
| Housing Benefit* | £0.00 | £64.32 |
* 48 week calculation (assumes 4 rent-free weeks)
Comparison of Family’s Disposable Income
His earnings £18,000 £17,100 Her Earnings nil nil Child Tax Credit £2,026.79 £2,245.75 Housing Benefit* £2,258.88 £2,508.48 Total Benefits £4,285.67 £4,754.23 Total Deductions (tax/NIC) £4,074.62 £3,777.62 Member Pension Contribution (grossed up to £1,153.85) £900.00 £0.00 Net Receipts £17,311.05 £18,076.61 Employer Pension Contribution ("grossed" up to include Employers NIC £1015.20) £0.00 £900.00
| His earnings | £18,000 | £17,100 |
|---|---|---|
| Her Earnings (part-time) | £5,000 | £5,000 |
| Child Tax Credit | £810.35 | £1,029.31 |
| Housing Benefit* | £0.00 | £64.32 |
| Total Benefits | £810.35 | £1,093.63 |
| Total Deductions (tax/NIC) | £4,097.44 | £3,800.44 |
| Member Pension Contribution (grossed up to £1,153.85) | £900.00 | £0.00 |
| Net Receipts | £18,812.91 | £19,393.19 |
| Employer Pension Contribution ("grossed" up to include Employers NIC £1015.20) | £0.00 | £900.00 |
* 48 week calculation (assumes 4 rent-free weeks)
(Housing benefit figures taken from City of Bradford Metropolitan District Council benefit services ready reckoner 9/8/05)
This last example illustrates an important point I think. It is easy to point out to someone that by opting for Salary Sacrifice they will pay less tax and National Insurance. It is equally true to say that sacrificing salary will for some people increase the Child Tax Credit to which they are entitled. But these are only part of the story and would lead to the assumption that the combination of decreasing tax and NI and increasing credits payable from Government will always result in an increase in take home pay. It may do, but it may not. It seems to me it is almost impossible to generalise on the way these different things interact. In this particular example take home pay goes up but the pension contribution goes down.
Well, I hope that seeing the way the numbers fall in those examples has been helpful. It’s certainly given me a much better idea of what goes on when people get involved with salary sacrifice. I’m sorry this BeeLine’s been a bit of a long haul for you all, I really do set out to write short, succinct stuff, but this one’s just run away with me. Until next time perhaps I can leave you with a quote from Derek Guyers: “The conclusion [of his study last year] is that the whole issue of advising on salary sacrifice is a lot more complex than we previously thought.” I can go along with that…..
15 August 2005
The examples used highlights some of the opportunities for planning, it should be recognised that it is not a complete or exhaustive description of the opportunities or pitfalls.
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice.
The details shown are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.
Source of Child Tax figures – HM Revenue and Customs Tax Credit calculator 9/8/05
Source of Housing benefit figures – City of Bradford Metropolitan District Council Benefits Service Ready Reckoner 9/8/05
