Can salary sacrifice affect your tax band?

[JacqueslePeacock]

Does anyone know if paying towards childcare before income tax as "salary sacrifice" can affect your tax band?

My DC attend a workplace nursery and the entire cost is taken from my DH's salary before tax. Without this deduction from his salary, he would be very slightly into the higher rate tax band. With the salary sacrifice, we had anticipated he would go back into the lower rate bracket, but no - he is still being taxed at the higher rate.

Does anyone know if this is right? It makes a difference to us because the higher rate of tax is applied because of a couple of additional hours my DH is working. He would choose to drop these hours and go back to a lower tax band if the salary sacrifice doesn't already put him in the lower bracket. HMRC seem to be giving conflicting advice on the matter so I thought I would try Mumsnet!

Does your DH complete a self-assessment tax return?

I'm a bit confused by your question. Personal tax in the UK is progressive so if the extra hours increase his salary above the higher rate tax bracket then the higher rate of tax would apply but only to the part of his income above the threshold.
How much is the childcare cost and for how many children? There are limits on how much can be taken from gross income (as in the amount you don't pay NI or tax on is capped).

In short, yes salary sacrifice can affect the tax band. It can also affect redundancy payments and other things like child benefit thresholds.

However, what you are describing is a deduction from salary. Your dh should be getting childcare vouchers instead of salary. Essentially he is swapping part of his salary for vouchers and because of this he avoids a bit of tax and NI.

Is his actually getting childcare vouchers? Or part of a scheme?

My DH's gross salary would put him into the higher rate tax band, but a combination of both pension contributions and the £243 per month salary sacrifice for childcare vouchers takes him below the lower limit for the higher tax band. I'm not sure what the rules are if the full nursery fee is sacrificed but you can only get the first £243 tax/NI free (ie would pay tax/NI on the difference between the full fee and £243) so I suspect that only the first £243 could also be used to reduce your gross income for tax purposes - but I could be wrong.

When the new tax limits come into place in April DH will be in the higher tax bracket (just) even after pension contributions and salary sacrifice so thanks Dave!

Ooh, now I'm really confused. HMRC just told us on the phone they didn't think the childcare deductions would have an effect on the tax band - but I'm not sure I believe them because they've sent us written notification of a different tax code every day for the last 5 days!

To answer the questions: Yes, sorry - it is a "salary exchange" scheme for the full cost of childcare (not just the £243 vouchers a month) because it's the workplace nursery. We have one DC in nursery (about £800 a month).

DH does not complete a self assessment. To complicate matters, he has more than one employer - and currently HMRC is saying that his tax band for his main employer is BR but his tax codes for all of the other employers (for whom he does bits and pieces here and there) are higher rate. His total salary minus the childcare cost definitely doesn't add up to enough to put him in the higher rate band.

Yes, salary sacrifice can affect tax band - but you will never be worse off going up a tax band - ie your DH working overtime will always result in more money in the bank, whatever tax rate he pays at.

The official blub can be found here along with the links. Its not an easy read tho!

It sounds like your DH's affairs are too complicated for the PAYE system to handle: he should ask to complete a tax return.

Having said that I would have expected the tax code on the main employment to be an "L" or "K" code, not BR.

Provided the nursery is an eligible workplace nursery scheme the £243 a month limit for other childcare benefits is irrelevant - such schemes are not taxable (or NIable) as a benefit however much they cost, and as long as the salary sacrifice also passes the appropriate tests then you pay no tax (or NI) on the amount by which your salary has been reduced.

Mr Anchovy - I read the BR line as his pay for the main employer is basic rate rather than a tax code

No, the BR is actually the code (presumably for basic rate) - although why it's not an L code I have no idea. Seems HMRC doesn't have too much idea either! I shall be waiting with interest to see if we get a new notification of a new code again tomorrow, to complete this week's set.

Have you seen a P800 for previous years? If not there is a fair chance he has been substantially overpaying tax.

You need an accountant.

No, his job is new as of September 2012 - which is presumably why we've just had this rash of notices about the new code. I'm getting a bit nervous about the idea that we need an accountant and he needs to submit his own tax returns! Almost everyone at his workplace does the same extra bits and pieces for other, related employers - and I've never heard of any tax issues with it. I think the only unusual thing for us is the salary exchange scheme.

"No, his job is new as of September 2012"

Ah, that makes sense. Probably he didn't give the new employer a P45, or if he did they didn't follow the correct procedure.

You need to call HMRC and notify them which employment is his main employment (use the reference on the relevant Notice of Coding). They should change the code for that job to 810L or similar, but that won't come through in time to sort things out for this year.

Some time around the end of May call HMRC and ask them to send you a P800. This will add up all of his earnings and work out what tax he should have paid, and take off the tax he has actually paid to find out the balance. If he is on the cusp of basic/higher rate PAYE alone is simply not capable of calculating the correct amount of tax.

Hi, not sure if this helps as I just have one employer but I do the full nursery fees salary sacrifice (the workplace nursery scheme - I have £835 taken out of my salary every month).

The tax code should change - for all intents and purposes his salary is deemed to be the lower amount (what's left after the sacrifice).

"The tax code should change - for all intents and purposes his salary is deemed to be the lower amount (what's left after the sacrifice)."

No, the tax code should stay the same. The tax code should only change if any taxable benefit is provided, or there is tax to be collected on other income.

His salary is not "deemed to be" the lower amount, it IS the lower amount. That is the essence of salary sacrifice. For some purposes (e.g. pension contributions, bonus calculations) it may be deemed to be the original, higher, amount.

Sorry mr anchovy, I stand corrected. I'm not an expert by any stretch, was just replying from my own personal experience.

MrAnchovy, I'm confused. The tax code shouldn't change, even though DH was only just over the line for higher rate tax and now his income has (technically) been decreased by about £800 a month? I feel that the tax code should change to reflect that he should now only be being charged tax in the lower tax bracket.

But the tax code doesn't normally determine how much tax is taken from your salary or at what rate, the amount you earn does. You start off with a tax code of 810L. This means that you can earn £8,105/12 each month before you pay income tax at 20%, and then another £34,370/12 each month before you pay 40%.

The 810L code may be different if you receive a taxable benefit, claim allowable expenses, or if you have other income which you elect to have taxed through PAYE, or if you earn over £100,000 in which case you start to lose your personal allowance.

Tax codes for second and further employments DO determine how much tax is taken from your pay each month and will be either BR (basic rate), D0 (higher rate) or if you are really lucky D1 (upper rate).

But the most important thing to remember is that PAYE is just a way of collecting tax (and national insurance) from your pay each time you are paid whereas your actual tax liability is calculated annually. So even if you are on the wrong tax code (such as D0 for a second job when in fact your total earnings are below the higher rate limit), this can all be sorted out after the year end either through a self assessment return (which is not as scary as it sounds, although you do need to talk to an accountant to be sure you are claiming everything you are entitled to) or through talking to HMRC and getting a P800 (in which case you are unlikely to claim everything you are entitled to because HMRC have no interest in helping you do that).