Salary Sacrifice and Universal Credit

HistoricalTicket

Hi all

I'm looking for some clarity on what should be a straight forward question but it seems the Universal Credit employee's aren't trained enough to answer, so hopefully someone here can. Universal credit employee's have been asked and they don't know, but I can't assume this answer.

Q: Myself and my Wife receive universal credit each month. I work full time and my wife looks after our 3 young children as childcare is too costly.

We are looking into a new scheme for a vehicle called Car Salary Sacrifice.

Now the amount the car would cost us is shown on a calculator but I'm unsure how this would work while still receiving Universal credit as this is worked out from my gross pay. The question is, the salary sacrifice amount would be deducted from my gross amount but doesn't guarantee that the universal credit would include this, thus leaving us with a huge difference in money.

Online this has been asked a few times but again no clear answers. All I want to know for certain is, if we agree to a car, the universal credit entitlement would rise if anything and work with the new amounts.

Alice_Holt

All I want to know for certain is, if we agree to a car, the universal credit entitlement would rise if anything and work with the new amounts.

  No I don't think your UC should increase because of your net salary has fallen due to the Car salary sacrifice.

AFAIK it's not an allowable deduction for UC - unlike, say, pension contributions.

"Deductions from employed earnings

UC is generally based on net income and therefore from the claimant’s employed earnings can be deducted:

• Any relievable pension contributions made to a registered scheme
• Income tax or national insurance contributions paid in the assessment period in respect of those employed earnings (note that although the legislation states only tax and NI in respect of the employed earnings can be deducted, in practice any tax that is paid is deducted even if it does not relate directly to the employment)
• Any sums withheld under a payroll giving scheme under Part 12, ITEPA 2003.

Full details of employed earnings can be found in ADM Chapter H3."

However, I'm unclear how UC manage to identify and amend such a deduction in practice. Your UC might increase but that could lead to an overpayment recovery in future.

Yamor

Your salary for UC purposes would be lower, as all BiKs are currently ignored for UC, meaning your UC would go up.

DWP have said in the past that they will consider bringing BiKs into account one day. But this was said many many years ago, and nothing has been done to date.

HistoricalTicket

Yamor said:

Your salary for UC purposes would be lower, as all BiKs are currently ignored for UC, meaning your UC would go up.

DWP have said in the past that they will consider bringing BiKs into account one day. But this was said many many years ago, and nothing has been done to date.

This is exactly my thoughts, all benefits in kind are ignored therefore the sum UC use for calculations is the reduced net amount.

The reason I had a slight doubt in my assumption is I did have a private medical membership which was also deducted from my gross salary but UC did include this and thus the figures they used for the UC payment was lower than the Net figure I was paid. I understood this because it isn't a BiK but it created this doubt for me.

I just hope things are as we expect and things don't change during the schemes period.

huckster

Depends on how your employer report the earnings information on the HMRC RTI system.

What can happen is that the employers report the gross earnings before BiK and they enter the BiK under a third party deductions section.  And because UC ignores the third party deductions entry, it means that UC still takes into account your full net earnings (gross, less Tax, NI and pension only), without the Bik having any effect at all.

Alice_Holt

Thinking aloud, but a salary sacrifice (SS) should appear on an employee’s payslip. 

The sacrificed amount will be shown as a deduction made before tax and National Insurance are applied.

UC will (I'm thinking) take the Gross pay less tax, NI, and pension contribution to get to their net earnings figure.

So, to the extent that tax & NI are reduced by the SS - the UC calculation will change.

However the deduction for a car* is not an allowable deduction, so that deduction (the employee paying his employer for his car) will be added back by UC to increase net earnings.


I have the impression the OP might be thinking that an increase in UC will cover his car deduction, otherwise he writes it will " leave us with a huge difference in money", and  "This is exactly my thoughts, all benefits in kind are ignored therefore the sum UC use for calculations is the reduced net amount."

However, I think the payroll deduction made by the employer to recoup the cost of the car from the employee’s salary will be treated the same by UC as was his private medical deduction.

It would seem odd that someone funding a car using SS was treated more favourably by UC than, say, someone buying that car on HP or PCP out of net earnings.  I rather doubt that UC will actually subsidise the OP's new car purchase, as he appears to be hoping.

* Or the payroll adjustment made by the employer to recoup the cost of the car from the employee’s salary.

HillStreetBlues

I believe from what I've read it's  how it's reported.
If it's BiK  then gross pay is lower and PAYE code is reduced  to account for BiK and you will get a  P11D form
If they use "Payrolled" the gross pay is higher and the cash equivalent of the BiK is deducted from gross pay and standard PAYE code.

So at a guess it's the later if they know about the private medical membership

Very happy to be corrected if wrong.

huckster

Most examples I have seen, the employers enter BiK on RTI as third party deduction, so the employee does not gain any extra UC.

HistoricalTicket

Alice_Holt said:

Thinking aloud, but a salary sacrifice (SS) should appear on an employee’s payslip. 

The sacrificed amount will be shown as a deduction made before tax and National Insurance are applied.

UC will (I'm thinking) take the Gross pay less tax, NI, and pension contribution to get to their net earnings figure.

So, to the extent that tax & NI are reduced by the SS - the UC calculation will change.

However the deduction for a car* is not an allowable deduction, so that deduction (the employee paying his employer for his car) will be added back by UC to increase net earnings.


I have the impression the OP might be thinking that an increase in UC will cover his car deduction, otherwise he writes it will " leave us with a huge difference in money", and  "This is exactly my thoughts, all benefits in kind are ignored therefore the sum UC use for calculations is the reduced net amount."

However, I think the payroll deduction made by the employer to recoup the cost of the car from the employee’s salary will be treated the same by UC as was his private medical deduction.

It would seem odd that someone funding a car using SS was treated more favourably by UC than, say, someone buying that car on HP or PCP out of net earnings.  I rather doubt that UC will actually subsidise the OP's new car purchase, as he appears to be hoping.

* Or the payroll adjustment made by the employer to recoup the cost of the car from the employee’s salary.

Alice I don't think you follow the train of thought at all. Salary sacrifice effectively means I work under a new contract of work with a lower salary. The car would be supplied and managed by a 3rd party company that my employer has agreed to organise business with. It isn't a company car.

Also, if UC did ignore the BiK and therefore massively reduced the amount we receive because they use the original gross amount then it would be like we are paying for the car twice! We would initially pay for the car from my sacrifice the the UC being so much lower means we would nearly pay for the car again! Not looking to make a profit from UC just want to make sure I don't fall into that issue.

It would make no sense for UC to reduce the amount because I'm paying for a car but as mentioned, it depends how the car deduction is reported. I'd hope they see the logical step to ignore BiK as they state and the UC would then be relevant to what I earn.

tomtom256

Just a side note, why should UC fund your car? It's no different to me leasing/purchasing a car on finance out of my wages. UC ignores outgoings and only calculates awards on income. So what Alice has written makes perfect sense.

HillStreetBlues

HistoricalTicket said:

Also, if UC did ignore the BiK and therefore massively reduced the amount we receive because they use the original gross amount then it would be like we are paying for the car twice!

Why would it mean you are paying for car twice?
UC either funds the car or you fund it, The worse way you just pay once.