Salary Sacrifice: could it benefit both employees and employers?
Together with Nick Bustin from Haysmacintyre our employment partner Sue King explores this possibility in more detail.
Cost of living crisis, increased interest rates and a hike in utility costs for households and businesses alike. Salary sacrifice schemes may not automatically spring to mind when employers consider how they could provide additional financial support to their employees. However, there are benefits for both employee and employer to be explored.
Changes introduced in the Finance Act 2017 saw a restriction in the number of benefits available to employees through tax-efficient salary sacrifice. Almost any non-cash benefit can be provided through salary sacrifice, but the question is whether salary sacrifice remains a tax efficient mechanism for providing that benefit.
The range of benefits that can be provided tax efficiently are now limited to the following:
- Cycle to work
- Ultra-low emission cars
- Retraining and out-placement courses; and
- Intangibles, such as additional annual leave.
The provision of other benefits through a salary sacrifice scheme would lead to a secondary tax charge applying (through the P11D) based on the greater of;
- the salary sacrificed; and
- value of the benefit provided.
Thus, rendering any other scheme pointless from the point of view of savings on tax and National Insurance (NIC). There are other savings for employees on benefits offered by employers such as supermarket vouchers or gym membership at discounted price; however, these are purchased out of net income (after deduction of tax), and not by way of salary sacrifice. In such schemes the savings arise from the employer signing up to a national scheme in which discounts are created by economy of scale rather than through tax efficient schemes.
What is Salary Sacrifice?
The concept of salary sacrifice is very simple. It is an arrangement between the employer and the employee, whereby the employee gives up part of their salary in return for a noncash benefit which may result in a tax and/or NIC saving. The sacrifice is achieved by varying the terms and conditions of the employees’ employment contract which relate to pay and in return receives an employer funded benefit. For the scheme to work future pay must be given up by the employee before it is treated as received for tax and NIC purposes.
This means that employee must have agreed, preferably in writing, to a lower salary before receiving the benefit in return. This is normally achieved by a written variation of the employment contract, or in some circumstances, for example in relation to a salary sacrifice in return for enhanced employer pension contributions, by choosing not to opt out of the proposed salary sacrifice scheme.
Employers normally have a policy and scheme rules in place to manage the salary sacrifice arrangements. It is important for employees to consider their own financial position before sacrificing salary as the impact of the salary sacrifice scheme will vary depending on an individual’s personal circumstances (see below). Employers should avoid giving financial advice to their employees, although it is a good idea to sign post staff to appropriate literature and advice about the impact of salary sacrifice on their finances.
However, it is recommended the employer provides as much information regarding the scheme, including not only the advantages but any disadvantages too! This will enable employees to make an informed decision.
How does a salary sacrifice scheme benefit both the employee and employer?
A tax efficient salary sacrifice scheme may be a valuable benefit to employees who are able to benefit from its terms. It gives the employee the opportunity to lease or purchase benefits while saving at their marginal tax rate of 20% or 40%. This means employers may find the introduction of salary sacrifice schemes may boost morale and aid retention.
There is also a financial incentive for employers to introduce salary sacrifice schemes and save the cost of employer national insurance contributions on the salary sacrificed. The money saved may be used in any way the employer sees fit – to support other benefits for employees or to provide a cash injection into an organisation facing financial difficulties.
What impact can salary sacrifice have on employees?
There are some aspects of salary sacrifice that employees need to be aware of; sacrificing salary means inevitably the employee’s salary is reduced. This can impact on a range of work-related benefits paid by the employer based on average earnings over a period of time, such as statutory maternity pay, statutory paternity pay, statutory sick pay etc.
It may also impact on employees’ pension contributions (both those made by the employee and the employer) and even mortgage applications as mortgage lenders may only be prepared to lend based on the reduced salary.
Employers must also be aware that salary sacrifice cannot be put in place, if it would reduce the employee’s salary, below the National Minimum Wage (“NMW”)/National Living Wage (“NLW”). The NLW, for workers over 25, for the period from April 2022 onwards, being £9.50 per hour and for workers aged 21-34 being £9.18 per hour. As a salary sacrifice scheme may last indefinitely the salary level for employees whose salary is close to minimum levels should be reviewed annually.
Whilst the changes introduced in 2017 limited the range of benefits which can be provided tax/NIC efficiently, the use of salary sacrifice can help employees with saving for their retirement. Furthermore, it is not uncommon for employers to share some of the NI savings with their employees in the form of additional pension contributions.
Employers are also using salary sacrifice to provide electric vehicles and promote their ‘green agenda’.
At Wrigleys we specialise in advising employers on salary sacrifice schemes relating to enhanced employer pension contributions and provision of intangibles such as additional annual leave. We regularly work with your pension provider and accountants to ensure you have appropriate contractual documents and tax advice in place. We collaborate with Nick Bustin (Head of Employment Taxes team, Haysmacintyre) in setting up salary sacrifice schemes for employers.
If you would like to discuss any aspect of this article further, please contact Sue King or any other member of the employment team on 0113 244 6100.
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The information in this article is necessarily of a general nature. The law stated is correct at the date (stated above) this article was first posted to our website. Specific advice should be sought for specific situations. If you have any queries or need any legal advice please feel free to contact Wrigleys Solicitors.