Salary Sacrifice and Universal Credit

Alice_Holt

HistoricalTicket said:

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... 



    Also, if UC did ignore the BiK and therefore massively reduced the amount we receive because they use the original gross amount then...

      Very possibly.

     But salary sacrifice arrangement is an agreement to reduce an employee’s entitlement to cash pay, in return for a non-cash benefit.

     I am just unsure that your assumption that UC will ignore the (sacrificed) non-cash benefit is correct. 

     Particularly as since April 2017 the employee is required to pay income tax on either the value of the car or the amount of salary sacrificed, so reducing the tax advantages for car salary sacrifice schemes. And of course, HMRC share data with the DWP for UC purposes.    

    This may well depend on how the non-cash benefit is reported to HMRC by your employer (and thence to UC via RTI), however as huckster has said most employers enter BiK on RTI as third party deduction, so the employee does not gain any extra UC.  

   My logic may well be incorrect, but I think that if you are banking on your UC increasing because you are taking part of your remuneration as a non-cash benefit in kind - then you may wish to do some more research.   


Note    that UC would not use just your gross salary. 
It would be gross less tax, NI, and pension but adding back any third party deductions. 
So, I think, your UC will remain about the same (whether taking a non-cash benefit as part of your overall remuneration or not).  I don't think you can bank on your UC increasing, as your total remuneration hasn't effectively reduced.

Really just a caveat for you to bear in mind. Can you find out the format in which your employer reports monthly salary RTI ?

     

Grumpy_chap

Alice_Holt said:

 
since April 2017 the employee is required to pay income tax on either the value of the car or the amount of salary sacrificed, so reducing the tax advantages for car salary sacrifice schemes. 

     

Except for if the car is an EV.  AIUI.

Yamor

I think there have been a number of misleading posts in this thread, and I apologise in advance for the length of this post.

UC does not currently include BiKs as earnings. This is legislated for in the UC Regs, Reg. 55(2)(a), and is confirmed in the ADM at H3081.

For the avoidance of doubt, despite the changes made for tax purposes in 2017, BiKs provided by way of 'salary sacrifice' are still taxed under the 'benefit code', and therefore do not count as earnings for UC. The 2017 changes simply changed the taxable amount of certain BiKs, but not the provisions they are taxed under.

This is clearly the legal position.

In practice, employer's have two ways they can report BiKs to HMRC:

Method 1:
This was the historically more common way employers dealt with BiKs.
An employer can simply report the value of the BiK via the P11D, submitted after the end of the tax year. It would then be up to HMRC to obtain the tax from the employee, usually by changing the employee's tax code.
With this method, the BiK does not get reported AT ALL to HMRC when the payroll is run.
The actual payslip provided to the employee may mention the deduction from salary, but this is simply for information purposes, and HMRC are not told about this. The figure reported to HMRC via the FPS will simply be the actual salary (i.e., after the deduction for the salary sacrifice), and this is the information passed on to UC.

Method 2:
There is another method, which has become quite popular in recent years, and that is where an employer "payrolls" the BiK. This means the 'taxable income' reported on the FPS will include the value of the BiK, and the employee will therefore be taxed on the value of the BiK automatically, with no need for a change in tax code.
When using this method, no P11D is required.
However, even with this method, the FPS will still include full details of the BiK, and this information IS passed on to UC. As such, the UC computer system should still be able to correctly remove the BiK from the taxable earnings figure used for UC purposes.
I am aware that the TaxAid website suggests that when a BiK is "payrolled" in this manner then it will affect UC. I do not believe this is correct.
However, even if I am wrong, the legal position is clear (as per the beginning of my post). As such, a claimant should find it relatively straightforward to get it corrected via MR/appeal (if necessary).

It has been mentioned that employers often report BiKs as TPDs. With all due respect, I emphatically disagree. Whilst of course there will be some cases where this mistake is made, the vast vast majority of accountants and payroll agents are well aware how to report BiKs.
BiKs are extremely common, and all of the many payroll software solutions clearly provide for doing it properly.

Coming back to UC, as mentioned, the law is very clear.
If UC would want to try and fight it, they could approach it in one of two ways:

1. They could argue that the BiK is not actually taxable as a BiK but as actual earnings under s. 62 ITEPA. Generally, such an argument could be made if the employee has the right at any point to cancel the salary sacrifice arrangement and be paid a higher salary.
However, this would also have tax and NIC ramifications, and it would essentially mean DWP were taking a different view than HMRC about how to treat the BiK. DWP do have the right to disagree with HMRC, but I think it is unlikely they would do so in such a case.
In any case, employer's are well aware of this issue (because of the tax ramifications), and will generally ensure that salary sacrifice arrangements cannot simply be changed whenever an employee wants, but require some sort of 'life event' before agreeing to make a change. (As an example of this, HMRC provided guidance to employers during Covid to say that they agreed that Covid was a significant enough 'life event' warrant an employee being allowed to change their salary sacrifice.)

2. They could argue that the employee's salary is lower than the going rate, and therefore treat the employee as having 'notional income'. This relies on a piece of Income Support case law which suggests that when deciding whether a salary is the going rate, all BiKs should be ignored.
The ADM at H3255 confirms that this is DWP's position.
However, I believe it is strongly arguable that the Income Support case law does not apply to UC. (It would probably double the length of this post to explain why I think that, so I'm not going to explain, sorry!)
Furthermore, to argue for notional income, UC would have to consider whether the claimant is being paid a reasonable rate (looking at comparable services in that location). They cannot simply consider whether the claimant could personally obtain a higher salary if they wanted to. In the majority of cases, even after the deduction of a BiK from the salary, the salary will still be on a reasonable level, in which case this would certainly not be an issue.

Phew.

HillStreetBlues

@Yamor
Trying to understand this a bit better on how it works and is reported
Method 1 the  DWP  wouldn't even see the BiK so not even know about car
Method 2 the DWP does see the BiK and might calculate UC  on the higher figure.

So an issue is how it's reported, Method 1 is very simple as DWP won't even know about the car.
Method 2 could be more troublesome, as might have to appeal if the higher wage figure is used to for UC

Yamor

HillStreetBlues said:

@Yamor
Trying to understand this a bit better on how it works and is reported
Method 1 the  DWP  wouldn't even see the BiK so not even know about car
Method 2 the DWP does see the BiK and might calculate UC  on the higher figure.

So an issue is how it's reported, Method 1 is very simple as DWP won't even know about the car.
Method 2 could be more troublesome, as might have to appeal if the higher wage figure is used to for UC

Yes, correct, and this is what TaxAid seem to worried about.

I personally don't think it will be an issue (although I haven't seen it in practice), because DWP have released which data items are transferred by HMRC in the RTI feed, and one of the items is the value of any BiKs which have been 'payrolled'. So I think it is likely that UC will correctly deduct it.

HillStreetBlues

Yamor said:

HillStreetBlues said:

@Yamor
Trying to understand this a bit better on how it works and is reported
Method 1 the  DWP  wouldn't even see the BiK so not even know about car
Method 2 the DWP does see the BiK and might calculate UC  on the higher figure.

So an issue is how it's reported, Method 1 is very simple as DWP won't even know about the car.
Method 2 could be more troublesome, as might have to appeal if the higher wage figure is used to for UC

Yes, correct, and this is what TaxAid seem to worried about.

I personally don't think it will be an issue (although I haven't seen it in practice), because DWP have released which data items are transferred by HMRC in the RTI feed, and one of the items is the value of any BiKs which have been 'payrolled'. So I think it is likely that UC will correctly deduct it.

I think it would be wise for OP to have a Plan B to take account of any delays that could happen if DWP do make an error.

HistoricalTicket

HillStreetBlues said:

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.

OK let me.put it a different way.

Say I bought a car on finance through a garage completely separate from my employer, that car cost £400 a month (example) then my UC would not be reduced as they would use the actual amount of money I'd been paid as a net figure.

But if I pay for the car on salary sacrifice, I lose the £400 out of my wages, then if UC ignored this deduction and used the original gross and net figures, they would then pay us LESS money by the same amount so we would almost be paying double for the car!

For the salary sacrifice scheme to work (backed by government to promote people buying Hybrid or EV, they would have to ignore this as the BiK that it is (BiK is taken as part of the monthly amount) then it completely contradicts the savings made from tax and NI and nobody should bother 🤷🏻‍♂️

HillStreetBlues

HistoricalTicket said:

HillStreetBlues said:

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.

OK let me.put it a different way.

Say I bought a car on finance through a garage completely separate from my employer, that car cost £400 a month (example) then my UC would not be reduced as they would use the actual amount of money I'd been paid as a net figure.

But if I pay for the car on salary sacrifice, I lose the £400 out of my wages, then if UC ignored this deduction and used the original gross and net figures, they would then pay us LESS money by the same amount so we would almost be paying double for the car!

They work out the same, say wages are £2k
1) £2k wages, plus UC based on £2k  minus £400 for car
2) £2k wages, minus £400 for car, if BiK is not taken into account UC is based on £2k wages, 
Both methods end up in same result, all that's different is the stage you pay for the car
You seem to be double counting the £400 in your calculations, as you would not be getting less money as both UC award is based on same amount (£2k)

Now if BiK is taken into account then number 2 is
£2k wages minus £400 car UC is based on 1.6k wages

Spoonie_Turtle

HillStreetBlues said:

HistoricalTicket said:

HillStreetBlues said:

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.

OK let me.put it a different way.

Say I bought a car on finance through a garage completely separate from my employer, that car cost £400 a month (example) then my UC would not be reduced as they would use the actual amount of money I'd been paid as a net figure.

But if I pay for the car on salary sacrifice, I lose the £400 out of my wages, then if UC ignored this deduction and used the original gross and net figures, they would then pay us LESS money by the same amount so we would almost be paying double for the car!

They work out the same, say wages are £2k
1) £2k wages, plus UC based on £2k  minus £400 for car
2) £2k wages, minus £400 for car, if BiK is not taken into account UC is based on £2k wages, 
Both methods end up in same result, all that's different is the stage you pay for the car
You seem to be double counting the £400 in your calculations, as you would not be getting less money as both UC award is based on same amount (£2k)

Now if BiK is taken into account then number 2 is
£2k wages minus £400 car UC is based on 1.6k wages

Which means UC pays more money, offsetting some of the £400 lease, thus effectively subsidising it.

HillStreetBlues

Spoonie_Turtle said:

HillStreetBlues said:

HistoricalTicket said:

HillStreetBlues said:

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.

OK let me.put it a different way.

Say I bought a car on finance through a garage completely separate from my employer, that car cost £400 a month (example) then my UC would not be reduced as they would use the actual amount of money I'd been paid as a net figure.

But if I pay for the car on salary sacrifice, I lose the £400 out of my wages, then if UC ignored this deduction and used the original gross and net figures, they would then pay us LESS money by the same amount so we would almost be paying double for the car!

They work out the same, say wages are £2k
1) £2k wages, plus UC based on £2k  minus £400 for car
2) £2k wages, minus £400 for car, if BiK is not taken into account UC is based on £2k wages, 
Both methods end up in same result, all that's different is the stage you pay for the car
You seem to be double counting the £400 in your calculations, as you would not be getting less money as both UC award is based on same amount (£2k)

Now if BiK is taken into account then number 2 is
£2k wages minus £400 car UC is based on 1.6k wages

Which means UC pays more money, offsetting some of the £400 lease, thus effectively subsidising it.

Yes, as I said previously

HillStreetBlues said:

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.