Sophie Chapman LLB ChMCIPPdip, group payroll and benefits manager at Gardline Limited discusses some of the benefits of salary sacrifice schemes

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Thanks to the increasing National Insurance (NI) bill, due to the health and social care levy, and the freeze to tax thresholds for 2022/23, employers are increasingly looking for efficient ways to offer benefits to employees. Although salary sacrifice is nothing new, and in fact, much more limited in its scope now, providing certain benefits in this manner can be a way of generating savings for both employees and employers without changing their current benefits offering.

 

What exactly can be offered via salary sacrifice?

Since April 2017, there has been a tightening of the schemes that can be offered via salary sacrifice. They’re now limited to:

• childcare

• cycle to work schemes

• ultra-low emission cars

• pensions.

A popular benefit to offer via salary sacrifice is pensions – employers are required to provide a pension and it’s often a benefit many employees are enrolled in. Therefore, the benefit would reach a large proportion of employees and generate a larger saving for employers. It may also make being part of a pension scheme and increasing contributions that little bit more affordable for employees.

 

How do salary sacrifice arrangements work?

Salary sacrifice arrangements involve an employee giving up part of their salary or earnings in return for a non-cash benefit. As salary sacrifice reduces their gross pay, it lowers the amount of tax and NI they pay, increasing their take home pay. As it reduces gross pay, it also reduces the amount of NI the employer must pay, thus making it an attractive option for both. As an employee is giving up part of their salary, this amounts to a change in contract and must be recorded in writing with the employee’s approval.

Employees can opt in or out of a salary sacrifice arrangement in the event of lifestyle changes which can significantly impact their financial situation, for example, divorce. If an employee wants to change the terms of their salary sacrifice, this must be confirmed in writing in each event, making clear which cash and non-cash benefits they’ll receive.

If an employee switches between cash earnings or a salary sacrifice benefit whenever they like, the tax and NI contribution advances will generally not apply. In the case of pensions, as the salary is being sacrificed, the employer makes the pension contributions on behalf of the employee. It’s important for the employer to bear this in mind when submitting pension returns to their provider.

It’s imperative to make employees aware that, because this is a salary sacrifice arrangement, they’re forfeiting part of their salary, which can have an effect on their entitlement to benefits and impact on borrowing levels for mortgages and other financial products.

The reduced salary could impact on entitlement to, or the amount of, maternity allowance or additional state pension the employee can claim – it may be less than the full rate or entitlement could be lost altogether. If the reduction takes an employee’s earnings below the lower earnings limit, it could result in entitlement to statutory payments such as maternity pay or sick pay being lost.

Salary sacrifice cannot take employee earnings below the national minimum wage (NMW). If employees are earning NMW, then pension contributions or any other salary sacrifice arrangement must be changed to net deductions. It’s important this is carefully monitored by the payroll team to ensure compliance.

Her Majesty’s Revenue and Customs (HMRC) will not give any advice or pre-approval for salary sacrifice schemes ahead of them being implemented; however, there’s no requirement to inform HMRC of a salary sacrifice arrangement.

 

Record keeping

It’s recommended that the following documents are kept and reviewed in relation to salary sacrifice arrangements:

• a variation to contract showing an employee agreeing to the changes

• a payslip before and after the variation

• the agreement between the employer and benefit provider

• for pension schemes – the registration and pension scheme reference number and any other documents relevant to the scheme, such as guides. 

• Policy article
• Professional magazine