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Even if a benefit is not exempt from tax and National Insurance, it can still be beneficial from the employee’s perspective to choose the benefit rather than cash salary, as this will save the employee Class 1 National Insurance contributions.
Most taxable benefits provided to employees are liable to Class 1A National Insurance contributions rather than to Class 1. Class 1A National Insurance is only payable by the employer – there are no employee Class 1A contributions.
By swapping cash salary for a non-cash benefit, the National Insurance liability switches from Class 1 (payable by both employees and employers) to Class 1A (employer only) saving employee National Insurance contributions.
However, the extent to which this is worthwhile will depend on the amount of National Insurance payable and may not be significant where the employee’s earnings are above the upper earnings limit (£50,000 for 2019/20). Care should be taken than any administration costs do not exceed the National Insurance saved.
As noted in Tips 2 and 3, from 6 April 2017 alternative valuation rules apply where benefits are provided under optional remuneration arrangements, such as salary sacrifice schemes. However, despite these rules, such arrangements can continue to generate National Insurance savings by moving the liability from Class 1 to Class 1A.
