Salary sacrifice pension scheme
Can both the employer and employee save money when making pension contributions?
Pension salary sacrifice is a method of saving National Insurance Contributions (NIC) for employers and employees and yet it is reported that almost 50% of employers do not have such arrangements in place.
With NIC rate increases (due to the Health and Social Care Levy) from 6th April 2022, there is now a stronger case for employers to consider it as it can lead to a saving of up to 28.3% on employee pension contributions dependent on the level of earnings. The Government has also confirmed it has no intention of abolishing salary sacrifice for pension contributions.
A salary sacrifice arrangement is an agreement between the employer and employee where the employee agrees to a reduction in salary or bonus and in return receives a benefit. The benefit here is a contribution by the employer of an equivalent amount into the employee’s pension scheme. The employee pension contribution therefore becomes an additional employer contribution and there is no difference in the total pension contribution made into the scheme.
Traditionally employee pension contributions attract tax relief but not NIC relief which means the employee has to pay NIC and the employer has to pay NIC. Under a salary sacrifice arrangement, no NIC is payable as the gross pay of the employee is reduced.
On employee pension contributions, for a typical basic rate taxpayer, this would lead to a saving of employee’s NIC of 13.25% and for the employer it would lead to a saving of 15.05% (there could also be an additional saving of 0.5% if the employer pays the apprenticeship levy). Employees can use their savings to either boost take home pay or increase their pension contributions. Employers are also at liberty to share some savings by increasing the pension contributions made for employees.
R&D note:
An increased saving would occur for employers through R&D claims. Provided the employees are linked to R&D activities, the entire pension contributions will be subject to R&D tax relief. Contributions under the pension salary sacrifice are considered employer pension contributions and therefore allowable for R&D purposes.
Under the current economic climate employers should look into offering an improved benefits package for employees where both parties financially benefit. There are many considerations that need to be taken into account in order to ensure that salary sacrifice arrangements are beneficial for both employers and employees as there is no “one fits all” arrangement.
How can Price & Accountants assist?
Our accounting firm in London is equipped with the best accountants and tax advisors that provide clients with tailored advice and support in all tax-related issues and tax planning. We would be happy to go through feasibility for pension salary sacrifice arrangements on a no-fee obligation basis to ensure it can be beneficial to both the employer and employee population. Get in touch with our team right away to learn more.
SHARES OR LOANS? Why lending capital can be more tax efficient than buying shares?
Every startup needs working capital to grow, and there are several ways to get this… but which one is the best? As the founder or owner, you could provide capital by purchasing more shares or by simply lending your company the cash. This could offer a more speedy return on your investment, and make you more tax efficient at the same time.
- Is funding by buying shares not advisable?
Many people buy shares in order to provide more capital, and while there is nothing wrong with this, depending on your situation there may be other, more beneficial ways. One of the biggest disadvantages of buying shares is that you may need to wait a while for any Return on Investment (ROI). Your company can pay you dividends but only when it is making a profit and in the case a new startup business, it may take a while. There’s also no guarantee that you’ll see a return on your investment at all.
- What’s so great about funding by loaning capital?
If you’re looking for a faster ROI as many founders, then lending your company the money could be the way to go forward. Providing a loan means that you can be paid interest straight away, plus loans are generally more flexible than being paid dividends as you can receive some or all of your money back without being required to cancel share capital, which could significantly affect your tax. This leaves you with more control of your money, which as an investor, feels much safer.
- How can being married help?
If you happen to be married or in a civil partnership, then lending to your company could bring you even better tax advantages, so it’s worth exploring this avenue fully.
These tax advantages also work if you are unmarried with a “significant other”, however as a general rule, it’s much easier if you have combined finances through a lawful marriage or civil partnership.
This arrangement can help you save on tax if your partner pays a lower rate of tax than you do, as they can lend you money and charge you interest. You then lend the money to your company and charge the company a similar interest rate.
- How does this work?
Doing things this way requires that a) the interest is taxable, and b) any interest paid on qualifying loans that are used for company funds, the purchasing of equipment, or for working capital for a trading company are tax deductible.
Here’s an example that breaks this process down:
Joe is a director, shareholder and higher rate taxpayer of the Joe Bloggs Ltd., and the business requires some new equipment. Joe’s wife Jane is a basic tax payer, and so she makes an interest-free loan of £100,000 to Joe, who then lends this to his company Joe Bloggs Ltd., charging interest at 7% per annum.
Joe is liable for tax of £2,800 (£7,000 x 40%) on the interest he receives from Joe Bloggs Ltd. Joe doesn’t pay Jane any interest which means there is no tax relief for him to claim (though the loan to Joe Bloggs Ltd. does qualify).
Alternatively, if Jane decides to charge Joe the same rate that he charges Joe Bloggs Ltd. (7%) instead of an interest-free loan, then the interest Joe pays Jane will be tax deductible. This means the taxable interest (£7,000) he is paid by Joe Bloggs Ltd. equals the tax deductible interest he must pay to Jane. One cancels out the other, and instead of paying £2,800 in tax, Joe pays nothing.
Jane’s loan to Joe isn’t a qualifying loan, so she will have to pay tax on the interest she receives from him. Luckily, as Jane is a basic rate taxpayer, her bill is £1,400, meaning a tax saving of up to £1,400, and possibly much less depending on Jane’s other sources of income. As mentioned earlier, the advantage of doing things this way means that even if Joe Bloggs Ltd. is not making a profit at the moment, it can still pay Joe a return on his loan. This is often the best and most tax efficient way for company founders to provide capital to their business.
Want to find out more about how this could help make you more tax efficient? Get in touch with our team at Price & Accountants to discuss how we can help. We are committed to helping small businesses in London and around the UK with their accounting needs, using Xero online accounting software and our expert team of advisors, all dedicated to helping your business flourish.
How to significantly reduce your tax bill by selling shares to your partner
Looking to become more tax efficient this year? Gifting shares of your business to your spouse is often recommended by small business accountants and tax advisors, in order to make use of both you and your partner’s tax-free allowances, and ultimately minimise the tax on dividends the company pays. This is a great move to make, however if you’re looking for ways to save even more and you also happen to have a mortgage, your accounting firm may not have told you to consider selling shares instead of gifting them. Here’s what you need to know:
- Firstly, why is joint ownership best?
Instead of owning your business alone, it is widely considered good practice to own it jointly with your spouse whenever one of you is paying a higher rate of tax than the other. When you both own shares in the company, you are both entitled to use your tax-free allowances, dividend nil rate band, and other rate bands, in order to reduce the tax paid on your company dividends. Owning with your partner is a great way to become more tax efficient.
- Should I have made my spouse a shareholder when I formed the company?
If you’re thinking it’s too late to make your spouse a shareholder in your company, it’s definitely not. Even if your spouse was not made a shareholder in the beginning, HMRC will still allow you to transfer ordinary shares to them as a gift in order to reduce your tax bill. No matter how long ago you formed your business, you can start the process of making your spouse a shareholder at any time.
- How does this help reduce my tax bill?
Here’s an example of this tax-saving plan in action:
Joe started his company (Joe Bloggs Ltd.) over ten years ago. It has grown considerably since then, and is now being valued at around £600,000. Joe Bloggs Ltd. pays Joe £100,000 per year in dividends, of which almost £50,000 is taxed at the higher rate, and naturally, Joe would like to save on tax wherever possible.
Joe’s wife, Jane, brings in less income, and so Joe’s accountant suggests that he gift half of the shares of Joe Bloggs Ltd. to Jane, in order to make the most of her tax-free allowances and basic rate band.
- Tax savings comparison
If you believe you could qualify for tax relief by implementing the plan above, you can discover the savings you could make in your business by getting in touch by emailing us to info@priceandaccountants.com or call us 020 3735 5119 at Price & Accountants to discuss how we can help you save on your tax this year.
We are committed to helping small businesses in London and around the UK with their accounting needs, using Xero online accounting software and our expert team of advisors, all dedicated to helping your business flourish.
SELL, DON’T GIFT: HOW TO SIGNIFICANTLY REDUCE YOUR TAX BILL BY SELLING SHARES TO YOUR PARTNER
Looking to become more tax efficient this year? Gifting shares of your business to your
spouse is often recommended by small business accountants and tax advisors. This is to
make use of both yours and your partner’s tax-free allowances, and ultimately minimise the tax
on dividends the company pays. This is a great move to be tax efficient, however if you’re looking for
ways to save even more and you also happen to have a mortgage, your accounting firm may
not have told you to consider selling shares instead of gifting them. Here’s what you need to
know:
- Firstly, why is joint ownership best?
Instead of owning your business alone, it is widely considered good practice to own it jointly
with your spouse whenever one of you is paying a higher rate of tax than the other. When
you both own shares in the company, you are both entitled to use your tax-free allowances,
dividend nil rate band, and other rate bands, in order to reduce the tax paid on your
company dividends. Owning with your partner is a great way to become more tax efficient.
- Should I have made my spouse a shareholder when I formed the company?
If you’re thinking it’s too late to make your spouse a shareholder in your company, it’s
definitely not. Even if your spouse was not made a shareholder in the beginning, HMRC will
still allow you to transfer ordinary shares to them as a gift in order to reduce your tax bill. No
matter how long ago you have incorporated your company, you can still make your spouse
a shareholder at any time.
- How does this help reduce my tax bill?
Here’s an example of this tax-saving plan in action:
Joe started his company (Joe Bloggs Ltd.) over ten years ago. It has grown considerably
since then, and is now being valued at around £600,000. Joe Bloggs Ltd. pays Joe £100,000
per year in dividends, of which almost £50,000 is taxed at the higher rate, and naturally, Joe
would like to save on tax wherever possible.
Joe’s wife, Jane, brings in less income, and so Joe’s accountant suggests that he gift half of
the shares of Joe Bloggs Ltd. to Jane, in order to utilise the most of her tax-free allowances
and basic rate band.
- So why is it better to sell and not gift the shares?
Here’s where it gets interesting. Typically, tax experts will advise you to gift the shares to
your spouse to save, which is acceptable. However, if you are currently paying off a
mortgage on your home, it may be more tax efficient for you to sell the shares to them at a
reduced rate instead. Selling the shares allows you to structure the transaction in such a way
that you receive tax relief on the interest you pay.
- How does this work?
Let’s say Joe and Jane have a mortgage of £200,000 on their home, and the interest they
pay on this loan is around £11,000 each year. Tax relief does not apply to loans used to buy
your home, but it often does when you are buying shares in a company (note: conditions
often apply).
If Joe sells shares to Jane for a discounted rate (we’ll use £100,000 as an example) instead
of gifting them to her, the loan that Jane takes out to make this purchase will then qualify for
tax relief. They can then use this money to pay back £100,000 of their mortgage.
In doing so, Joe and Jane have effectively switched the £100,000 payment to pay towards
their home mortgage instead of the sale of shares in the company. The interest from the
money that goes towards the sale of shares qualifies for tax relief, meaning the interest paid
is around £5,500 per year, and around £1,100 of this gets knocked off their tax bill.
If you believe you could qualify for tax relief by implementing the plan above, you can discover the savings you could make in your business by getting in touch by emailing us to info@priceandaccountants.com or call us 020 3735 5119 at Price & Accountants to discuss how we can help you save on your tax this year.
We are committed to helping small businesses in London and around the UK with their accounting needs, using Xero online accounting software and our expert team of advisors, all dedicated to helping your business flourish.