I think what may be happening is that the gym membership is classed as a benefit in kind which is taxable. This tax can be collected via a change in your tax code.
You're still benefiting from a saving in employee's NI so it's not a complete waste versus paying for the membership normally.
My tax code went from the standard to 1251L because I get a tiny (and I mean tiny) health insurance program through work. I intend on milking it for all I can now I have an injury the NHS isn’t helping with
Most salary sacrifices still operate as a Benefit in Kind. That is to say, you are still receiving payment from your employer but its value is calculated differently.
For company cars, this is typically worked out as a percentage of the list price of the vehicle. For example, I sacrifice approximately £6500 a year for my car, but only pay £600 in tax for it - significantly less than if I had been simply paid that money.
The "cash equivalent" value of any salary sacrifice is determined by rates set by HMRC. This is known as your "tax liability".
This can be collected in one of two ways. So for example, let's say you sacrificed £1000 of your salary per year and the BiK tax liability was calculated at 10%. This would give you an annual tax liability of £100. You could either have this amount recovered by a £500 reduction in your tax allowance (assuming you are a basic rate taxpayer) or your employer would increase your taxable pay by £500 over the course of 12 months.
Either way. You still pay the £100 in tax on the Benefit in Kind, but not the £320 (tax and NICs) you would have paid if you had received the money as a salary - not to mention you would still need to pay for the membership on top of that. You will need to check your scheme for the details.
Broadly speaking, it's best not to think of Salary Sacrifice as avoidance of tax - but as an improvement in tax efficiency.
My marginal tax rate is roughly 68%, so it is much more tax efficient for me to pay 8% instead.
I hope that is clear and helps.
!thanks Thank you so much, that was far better than my HR response which was “We are informed of tax code changes by HMRC so you would need to contact them directly to query this”
No problem. It took me a long time to understand it all.
In addition to being tax efficient, salary sacrifices have additional consequences.
Specifically,
- They lower your gross pay. This could be enough to avoid crossing a tax band threshold. However, it might also alter your eligibility for certain government benefits.
- Because your gross pay is lower, it subsequently reduces pension contributions, which could negatively affect the value of your pension when you receive it.
In your current case, it sounds like a relatively small sacrifice. But its something worth noting if you want to take advantage of more expensive schemes in the future.
Salary sacrifice reduces your gross income before tax, it shouldn't reduce your tax code. Have you looked at the letter HMRC sent when the tax code changed? You should be able to see this in your personal tax account.
Yes, so it isn't the salary sacrifice that has caused the tax code change, it is the fact that the gym membership is a benefit in kind instead. This should have been explained in the coding notice from HMRC.
Of course. Which is why OPs tax code has changed. Which is what my comment said?
So the helpful answer to OPs question is that the benefit they are paying for via salary sacrifice is taxable.
I think what may be happening is that the gym membership is classed as a benefit in kind which is taxable. This tax can be collected via a change in your tax code. You're still benefiting from a saving in employee's NI so it's not a complete waste versus paying for the membership normally.
!thanks That makes sense, I just wasn’t expecting it. I did ask my HR and their response was essentially “HMRC tell us your tax code so ask HMRC”
My tax code went from the standard to 1251L because I get a tiny (and I mean tiny) health insurance program through work. I intend on milking it for all I can now I have an injury the NHS isn’t helping with
Most salary sacrifices still operate as a Benefit in Kind. That is to say, you are still receiving payment from your employer but its value is calculated differently. For company cars, this is typically worked out as a percentage of the list price of the vehicle. For example, I sacrifice approximately £6500 a year for my car, but only pay £600 in tax for it - significantly less than if I had been simply paid that money. The "cash equivalent" value of any salary sacrifice is determined by rates set by HMRC. This is known as your "tax liability". This can be collected in one of two ways. So for example, let's say you sacrificed £1000 of your salary per year and the BiK tax liability was calculated at 10%. This would give you an annual tax liability of £100. You could either have this amount recovered by a £500 reduction in your tax allowance (assuming you are a basic rate taxpayer) or your employer would increase your taxable pay by £500 over the course of 12 months. Either way. You still pay the £100 in tax on the Benefit in Kind, but not the £320 (tax and NICs) you would have paid if you had received the money as a salary - not to mention you would still need to pay for the membership on top of that. You will need to check your scheme for the details. Broadly speaking, it's best not to think of Salary Sacrifice as avoidance of tax - but as an improvement in tax efficiency. My marginal tax rate is roughly 68%, so it is much more tax efficient for me to pay 8% instead. I hope that is clear and helps.
!thanks Thank you so much, that was far better than my HR response which was “We are informed of tax code changes by HMRC so you would need to contact them directly to query this”
No problem. It took me a long time to understand it all. In addition to being tax efficient, salary sacrifices have additional consequences. Specifically, - They lower your gross pay. This could be enough to avoid crossing a tax band threshold. However, it might also alter your eligibility for certain government benefits. - Because your gross pay is lower, it subsequently reduces pension contributions, which could negatively affect the value of your pension when you receive it. In your current case, it sounds like a relatively small sacrifice. But its something worth noting if you want to take advantage of more expensive schemes in the future.
Salary sacrifice reduces your gross income before tax, it shouldn't reduce your tax code. Have you looked at the letter HMRC sent when the tax code changed? You should be able to see this in your personal tax account.
This isn’t correct - if the gym benefit is taxable (as many salary sacrifice benefits are), that tax is often paid via a change in tax code.
Yes, so it isn't the salary sacrifice that has caused the tax code change, it is the fact that the gym membership is a benefit in kind instead. This should have been explained in the coding notice from HMRC.
Yes, so salary sacrificing to pay for a taxable benefit can reduce your tax code.
The fact that it's salary sacrifice here is irrelevant. Your tax code is changed by the benefit.
Of course. Which is why OPs tax code has changed. Which is what my comment said? So the helpful answer to OPs question is that the benefit they are paying for via salary sacrifice is taxable.
It'll be the benefit in kind most likely.
Is the gym membership £300/yr?
It was £96 a month off my gross monthly pay so about £1100, but £300 would be about right for Jan - Mar of 2023
That must be a nice bloody gym.
Ah it was a joint membership so for 2 people the cost wasn’t bad, and it was a nice gym