Salary Sacrifice and Employee Loan

Can the employee loan be repaid out gross pay sacrifice?

Didn't find your answer?

Sorry - probably a  simple question but haven't satisfied myself I've found the answer.   Can an employer make a loan to an employee of £10,000 and allow the employee to repay it using a form of salary sacrifice by forgoing gross quarterly bonuses until the original sum is repaid?

That is to say repay it more quickly with gross pay sacrifice rather than repaying out of net pay.  As it will be repaid out of expected quarterly bonuses it will not require a formal salary sacrifice of basic monthly pay but will be foregoing quarterly bonuses.  Of course, this will be documented but is it OK?  I can't find a definitive answer but am sure it is not difficult for someone who has come across Salary Sacrifice regularly or has better knowledge of PAYE regs than me.

Many thanks in anticipation.

 

Replies (24)

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By Truecon
14th May 2021 10:47

I suggest:
1)calculate the net pay for the quarterly bonus month without the bonus e.g £1k
2)Calculate the net pay for the quarterly bonus month with the bonus e.g £2.5k
3)Make a post tax/ni etc payroll deduction for the diff of £1.5k and offset against the loan

Then the bonus is taxed correctly

I wouldn't imagine you can use the gross, surely then you are making an employee benefit to be taxed regardless (you'll just be hiding from payroll)

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By Paul Crowley
14th May 2021 10:56

Not salary sacrifice. That term is used in a technical way
But employee can have an after tax and NI deduction from wages used to repay the loan.

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By sarahg
14th May 2021 10:50

No the repayments need to come from net pay

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By Duggimon
14th May 2021 10:51

If you could then we could all loan out employees their annual salary at the start of the year, have them repay it out of gross pay and they'd never pay tax.

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Replying to Duggimon:
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By Comptable
17th May 2021 10:01

Your cash flow must be brilliant!
Can you share the secret please?

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Replying to Comptable:
By Duggimon
17th May 2021 10:04

Tax evasion, obviously!

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By tom123
14th May 2021 10:54

If things look too good / easy to be true - then they are.

I wouldn't spend too much time trying to 'prove' this cannot be done, as common sense tells you it cannot be permissible.

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By aidan.costello
14th May 2021 10:56

Thanks - my view was it doesn't work. Just wanted to be sure I am right! Appreciated the answers thus far that seem to confirm my thinking.

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Replying to aidan.costello:
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By Hugo Fair
14th May 2021 11:20

"Appreciated the answers thus far that seem to confirm my thinking."

They don't "seem to" ... they should be taken as categoric, if only because (aside of all the other issues) Salary Sacrifice can only be considered for a non-cash benefit.

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Replying to Hugo Fair:
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By Tax Dragon
14th May 2021 11:29

You've fallen for the trap that Paul pointed out - using 'salary sacrifice' in its technical sense. OP is talking about using bonuses to repay a loan. I don't know what that is, but it's not salary sacrifice... indeed the OP (confusingly) even said as much in the OP!

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Replying to Tax Dragon:
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By Hugo Fair
14th May 2021 11:48

Well this heffalump has always been a willing participator in testing traps.
But FWIW I was concerned that OP's concluding post suggested a lack of absolute certainty regarding the option to re-pay from gross salary. So, since the only 'cover' for so doing that OP had suggested was 'a form of Salary Sacrifice', I was endeavouring to point out that wouldn't even get onto the starting-blocks (let alone off them)!

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Replying to Hugo Fair:
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By Tax Dragon
14th May 2021 12:37

This is another faux Aweb argument we're having*. I think we agree in every regard, but make the same point in different ways, leading to apparent disagreement when there is none.

*.oO They seem to follow me around.
[Pauses for thought.]

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Replying to Tax Dragon:
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By Hugo Fair
14th May 2021 13:02

I see no disagreement (even holding telescope to good eye), or indeed argument.
I prefer to classify it as clarification during discourse!

[The concept of being stalked by faux arguments has given me an idea for a short story - so many thanks].

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Replying to Tax Dragon:
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By aidan.costello
14th May 2021 11:50

Agreed that the use of the term "Salary Sacrifice" was confusing/incorrect. It was a question as to whether the forgoing of bonuses in gross form could be used to clear down the loan. I have said it doesn't work to the person who suggested it but just wanted to be sure I was right to say that.

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Replying to aidan.costello:
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By Samantha20
15th May 2021 08:44

Yes, I have had several employees over the years asking this, as if they are the only ones to have ever thought of it.

I just say that if it was possible, everyone would be doing it as they wouldn't have to pay any tax or ni ever.

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By PChapman
17th May 2021 12:22

No!

You need to put the bonuses through paye as usual
The loan can be repaid as a deduction from Net pay. The repayment schedule is upto the company...
make sure you document the agreement and include a clawback so that if the employee leaves you have the ability to reclaim the loan.

You don't say whether interest is charged or not
bear in mind that at that level you are right on the limit for tax free loans, and the £10k limit is ALL loans outstanding not per loan also you do not say whether this employee is a director, in which case the 9 month rule for loans to Directors comes in to point! as well as potential P11d Bik for the employee

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By aidan.costello
17th May 2021 13:56

Thank you Pater, much appreciated. No other loans and not a director but spot-on observations.

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By The Dullard
17th May 2021 15:36

So, the "loan" is, in reality, an advance of the bonuses!

Payroll the £10,000 "loan" that he does receive and don't payroll the quarterly bonuses that he then goes on to not receive. It's as simple as that.

PAYE/NI is due when the employee receives a payment of, or on account of, their earnings.

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By tony-b
21st Dec 2023 12:23

This is an old thread but could anyone comment on the meaning of this HMRC guidance in the context of this thread?

"You do have to report loans to your employees or their relatives if they’re made as part of a salary sacrifice arrangement."

https://www.gov.uk/expenses-and-benefits-loans-provided-to-employees/wha...

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Replying to tony-b:
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By Tax Dragon
21st Dec 2023 13:10

It means what it says. Linking it to this thread does not change its meaning and I'm not sure what point you are making.

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Replying to Tax Dragon:
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By tony-b
21st Dec 2023 14:15

It was the comment that "... Salary Sacrifice can only be considered for a non-cash benefit." by Hugo that confused me.

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By FactChecker
21st Dec 2023 19:05

You need to treat almost any guidance within GOV.UK as facile (or at least take it with a pinch of salt where you try to read it within the context of the gov.uk topic) ... or preferably seek out the actual relevant legislation.

In the case of your URL, the topic is "Expenses and benefits: loans provided to employees" - and its the treatment of the loan as a Benefit (low or no interest) that is under discussion. [It is NOT about the loan itself (such as not being repaid or treated like a gift which would then be a 'cash benefit' and should go through payroll rather than being considered a BiK).]

So the *provision of* a Loan (not the loan itself) on preferential/non-commercial terms is a non-cash BiK - and is the purpose of guidance provided by that gov.uk page.

What do they mean by the additional sentence "You do have to report loans to your employees or their relatives if they’re made as part of a salary sacrifice arrangement" ... it's so badly worded that who can be certain?
But it doesn't change the basic precept that "... Salary Sacrifice can only be considered for a non-cash benefit."

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Replying to FactChecker:
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By Tax Dragon
21st Dec 2023 22:31

Attempting to understand a single sentence with no regard to its context is to invite failure.

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Replying to FactChecker:
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By tony-b
22nd Dec 2023 11:15

Thanks for the helpful reply

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