Salary sacrifice and school fees - Crowe Horwath International

Employment Tax and Advisory Services
Salary sacrifice and
school fees
Sacrifices of income in exchange for
additional benefits allow employees
to increase the benefits they receive
and may also allow both employee
and employer to save tax and
National Insurance (NI). In this case
the school benefits directly for every
member of staff who sacrifices
salary for school fees.
What is salary sacrifice?
Salary sacrifice is a well-recognised
concept. Under a salary sacrifice
arrangement an employee gives up
some of their contractual entitlement
to cash earnings, in return for new or
increased entitlement to a non-cash
benefit.
How does it work?
HMRC have decided that the
prerequisites for a successful salary
sacrifice arrangement are:
a salary reduction (not
deduction) that is in writing
a degree of permanence
that the agreement should be in
place before entitlement to the
salary to be sacrificed has
arisen.
School fee schemes
Salary sacrifice school fee schemes
are accepted by HM Revenue &
Customs (HMRC) as legitimate tax
planning and they are relatively
simple to administer once
established.
Different schools will offer different
levels of discount, the key however
is that tax is due on the marginal
cost of providing the school place.
This follows the landmark Pepper v
Hart case.
Staff fee discounts have become a
significant cost to schools and
therefore some schools have been
looking at alternatives and cost
effective ways to offer such
schemes.
Implementing salary sacrifice
therefore provides an opportunity to
review the current level of discount
and potentially renegotiate the
percentage discount and achieve a
win:win situation.
Implementing the scheme
The sacrifice is achieved by varying
the employee's terms and conditions
of employment. The scheme will not
be effective if the employee has
merely asked the school to apply
part of their salary to cover the
discounted school fees and
continues to receive the higher level
of cash remuneration.
Not for Profit - Schools
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There is no formal requirement to
inform HMRC that a scheme has
been established, however most
schemes will involve negotiation with
HMRC around the marginal cost.
Example 1:
The employee is not entitled
currently to a fee discount
however they decide to enter into
a salary sacrifice arrangement and
sacrifice the total school fees of
£15,000. It has been agreed with
HMRC that the marginal cost is
£2,250*.
Pre-salary sacrifice position: basic
rate taxpayer
Gross salary: £35,000
Employee Tax and NIC due:
£8,838.12
Employer NIC: £3,854.52
New gross salary: £20,000
Employee Tax and NIC due:
£4,038.12
Employer NIC: £2733.12
Tax on P11D benefit*: £450
Employer’s Class 1A NIC on P11D
benefit: £310.50
Total saving for employee (tax and
NIC): £4,350
Total saving for the employer (NIC
saving):£810.90

Crowe Clark Whitehill Not for Profit – Schools
Example 2:
The employee is currently entitled
to a fee discount of 50% on the
school fees of £15,000. They then
decide to enter into a salary
sacrifice arrangement for the
remaining fees of £7,500. It has
been agreed with HMRC that the
marginal cost is £2,250*.
Pre-salary sacrifice position: basic
rate taxpayer
Gross salary: £35,000
Employee Tax and NIC due:
£8,838.12
Employer NIC: £3,854.52
New gross salary: £27,500
Employee Tax and NIC due:
£6,438.12
Employer NIC: £2,819.52
Tax on P11D benefit*: £450
Employer’s Class 1A NIC on P11D
benefit: £310.50
Total saving for employee (tax and
NIC): £1,950
Total saving for the employer (NIC
saving):£724.50
What issues need to be
addressed?
It is important to engage employees
early, consistently, positively and
effectively in order to achieve
support for the arrangement.
In addition it must be remembered
that an employee’s salary postsacrifice
cannot fall below the
national minimum wage.
Most salary sacrifice schemes allow
the employee to receive benefits
such as pension contributions and
so on based on the pre-sacrifice
salary level. This is a matter for the
employer to decide and HMRC will
not be concerned about these
aspects.
Salary sacrifice involves an
alteration of employee remuneration
terms which must be legally effective
to achieve the desired tax and NI
treatments. We will guide you
through the salary sacrifice process
ensuring an effective arrangement to
maximise your savings.
How can Crowe Clark Whitehill
help?
We can help you introduce a fully
risk managed arrangement to
motivate and retain employees
whilst saving you money. We can
help you to:
formulate a policy in relation to
sacrifice arrangements
communicate the policy to
those to whom it may apply
draft the necessary
documentation
project manage
implementation.
.
Key facts:
increase in overall pay for
employees
a saving in employers NIC –
13.8%.
For further information on the issues raised here or to discuss employment tax more generally, please
contact one of the following or your usual Crowe Clark Whitehill contact.
London Cheltenham Manchester
David Daly Karen Goodwin Steve Livingston
020 7842 7364 01242 234421 0161 214 7500
david.daly@crowecw.co.uk karen.goodwin@crowecw.co.uk steve.livingston@crowecw.co.uk
Susan Ball Kent Thames Valley
020 7842 7238 Simon Warne Stuart Weekes
susan.ball@crowecw.co.uk 01622 767676 0118 959 7222
simon.warne@crowecw.co.uk stuart.weekes@crowecw.co.uk
Brian Robson
020 7842 7147 Midlands Associate member of Crowe Clark Whitehill UK
brian.robson@crowecw.co.uk Paul Edwards Isle of Man 01624 627335
0121 543 1900
paul.edwards@crowecw.co.uk
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