Salary Sacrifice
While cash remuneration is a primary method for attracting and rewarding employees, it is not the only option. There are numerous non-cash benefits available through salary sacrifice schemes, which can serve as powerful incentives for employee attraction and retention.
In this article, we explore the different types of salary sacrifice options, their tax implications, and the pros and cons for both employers and employees, ensuring you can make informed decisions.
What is Salary Sacrifice?
Salary sacrifice, also known as salary exchange, is an arrangement between an employer and an employee where the employee agrees to give up a portion of their pre-tax salary in exchange for non-cash benefits. These benefits can include goods or services such as increased pension contributions, childcare vouchers, or transport options like bike-to-work schemes. . Participation is voluntary, and employees can opt in and out of these schemes. Most schemes, like the Cycle to Work scheme, must be available to all employees, necessitating robust HR processes for contract updates and payroll information.
How Does Salary Sacrifice Work?
Agreement: The employee and employer agree on the amount of salary to be sacrificed and the type of benefit to be received in return.
Salary Reduction: The agreed amount is deducted from the employee's gross salary before tax and National Insurance contributions are calculated.
Provision of Benefits: The employer provides the non-cash benefit, which can range from childcare vouchers to increased pension contributions or leasing a bike or car.
Before entering an agreement, the cash value of the benefits must be determined to ensure fair compensation for the employee's reduced income. The arrangement must not lower the employee’s cash earnings below National Minimum Wage (NMW) rates, so procedures to cap salary sacrifice deductions are essential. For example, an employee with a £30,000 annual salary might agree to a £25,000 salary plus a £5,000 pension contribution, effectively sacrificing £5,000 of salary for increased pension benefits.
What Salary Sacrifice Schemes Are Available?
Bike (Cycle to Work Scheme): Employees hire a bike for the agreement period, with various providers simplifying the process. At the end of the hire period, employees can rehire, purchase, or return the bike.
Car: Employees sacrifice a fixed amount of salary each month for a leased car, covering essentials like road tax, insurance, and maintenance. The leasing company owns the car, and it’s returned at the end of the lease term.
Pension: Employers contribute a minimum of 3% to the workplace pension scheme, though this can be increased through salary sacrifice. Employees can sacrifice part of their salary for higher pension contributions, provided their reduced salary remains above the NMW and within annual pension contribution limits.
Childcare Vouchers: Though closed to new applicants, existing participants can continue sacrificing up to £55 a week for childcare vouchers to use with registered providers.
Tax and National Insurance Implications
Salary sacrifices are deducted from pre-tax salary, resulting in savings on income tax and National Insurance for employees. For example, if an employee sacrifices £50 from a £350 weekly salary for childcare vouchers, only £300 is subject to tax and National Insurance. Employers save on National Insurance contributions, typically 13.8%, on the sacrificed salary portion. However, non-cash benefits require different reporting to HMRC at the end of the tax year.
It is important to note that salary sacrifice can affect an employee's entitlement to contribution-based benefits such as Incapacity Benefit and State Pension. It may reduce the cash earnings on which National Insurance contributions are charged.
Advantages of Salary Sacrifice:
Tax Savings: Both employees and employers save on tax and National Insurance.
Cost Management: Employees can afford high-cost items through manageable monthly payments.
Attraction and Retention: Employers can attract and retain talent by offering attractive benefits.
Disadvantages of Salary Sacrifice:
Impact on Credit: A reduced salary can affect credit or mortgage applications.
Statutory Payments: Work-related statutory payments like maternity or sick pay, which are based on average earnings, could be affected.
State Benefits: an employee's entitlement to contribution-based benefits such as Incapacity Benefit and State Pension is affected by reduction on NI contributions.
Benefit in Kind Tax: Employees may need to pay Benefit in Kind tax for certain benefits like leased cars.
Lease Agreement: For employers, high staff turnover can complicate lease agreements, leaving ongoing payments or early termination charges.
Salary Sacrifice FAQs
Can employees opt in and out of salary sacrifice schemes? Yes, changes require contract alterations, typically maintained for at least 12 months unless there are significant lifestyle changes.
Does salary sacrifice appear on a payslip? Yes, as a deduction made before tax and National Insurance.
Can salary sacrifice be backdated? No, it’s valid from the agreement date, reflected in the signed contract.
Can salary sacrifice be mandatory? No, it’s a voluntary arrangement agreed upon by both employer and employee.
Is Salary Sacrifice Worth It?
Salary sacrifice can be a win-win for both employers and employees if managed properly. It offers financial advantages and access to desirable benefits, contributing to employee satisfaction and retention. However, it’s crucial to carefully consider the implications on statutory payments and credit applications. Employers should ensure that the arrangements comply with regulations and maintain transparency with employees about the benefits and potential drawbacks.
To discuss your payroll requirements and salary sacrifice contact our team on: O142O 544 444
