A sacrifice worth making?
Salary sacrifice (also termed salary exchange) is a contractual arrangement whereby an employee gives up the right to receive part of their cash remuneration in return for their employer providing some form of non-cash tax-free or tax-favoured benefit. This is a common arrangement used by employers to save National lnsurance.
There are a number of different non-cash benefits that can be provided which include, for example, pensions, nursery care, bikes, low-emission cars, mobile phones, extra holiday etc. There are some other less well-known ones too which work if the circumstances are right such as exchanging salary for day-subsistence allowances, for car parking spaces and for uniforms.
Contracts of employment
Where an employee agrees to a salary sacrifice in return for a non-cash benefit, they give up their contractual right to future cash remuneration. Statutory earnings related payments such as Statutory Maternity Pay (SMP) and Statutory Sick Pay (SSP) are based on cash earnings and so will potentially be affected by salary sacrifice arrangements. The impact on an employee’s tax credits position will also need to be considered. Whether contributions into an occupational pension scheme are affected by salary sacrifice is up to the employer and the terms of their pension scheme. If the scheme rules permit then they might introduce a ’notional’ or ’reference’ salary to ensure that other salary-linked benefits, and final salary pensions, do not fall along with the salary sacrificed.
Benefits of salary sacrifice schemes
The main financial benefit of salary sacrifice arrangements is the saving of National Insurance. And these potential savings will only increase following the recent hikes in National Insurance rates (up to a current combined employer and employee rate of 25.8% in some cases). Savings can be made by both employer and employee of National Insurance and in many cases the employee will save tax too. For example, it has been estimated that
childcare vouchers save employers around £370 a year for every employee who orders the maximum number of vouchers. If multiplied across 25 employees, this would give the employer an annual NI saving of £9,250.
Issues to consider
Salary sacrifice arrangements should only be implemented where there can be clear evidence of a change in the employee’s contract of employment (which shows they no longer have entitlement to the original salary). It is also advisable that the salary sacrifice arrangements actually run for a reasonable period of time; whilst the required period is not set out in legislation, it is suggested that the arrangement should run for at least 12 months.
And any salary sacrificed under these arrangements should not take pay below National Minimum Wage rates. Employers and employees who are thinking of entering into salary sacrifice arrangements should always obtain professional advice. Our employment tax team can discuss with you the full range of possible tax-free or tax-favoured benefits you could consider operating a salary sacrifice plan around. They can help you to develop and implement your salary sacrifice scheme and to get HMRC’s approval of the plan once it is in place. And, following the scheme’s implementation, they can also undertake a review to ensure that it continues to meet the original objectives set.