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Swap Salary for Benefits

Newsletter issue - June 07.

Some benefits are really worth having, such as childcare vouchers or free parking, but they can be expensive for the employer to provide. A solution is for the employee to voluntarily reduce his or her salary by the value of the benefit or some other agreed sum, and the employer pays the benefit directly. The agreement to reduce salary must be made in advance and in writing, perhaps as an adjustment to the employment contract, but this arrangement can work to the advantage of both parties.

Take the example of car parking; which is often in short supply, and expensive, in city centre locations. If the cost of car parking is £10 per day, this adds up to £2,400 for 48 working weeks. An employee on basic rate tax needs to earn £3,582 gross to have £2,400 net after deduction of tax at 22% and NICs at 11% to pay for this parking.

Where the employer pays for a parking permit for the employee to park at or near the place of work, the employee is not taxed on that benefit. Note the parking must be at or near the actual place of work, not at the railway station near the employee's home.

In this example the employee chooses to reduce their salary by £2,400 and the employer pays for a parking permit. The employer gets a tax deduction for the cost of the permit in its own accounts, and saves 12.8% employers NIC on the reduced salary. The employee now gets this benefit tax free plus the remainder of the taxable salary that wasn't sacrificed (£1182) so everyone wins - except of course the Taxman!