Key considerations for salary sacrifice schemes

Scott McFarlane

Scott McFarlane

Employer Services Senior Manager

The well-publicised recent uplift to NIC rates for employees and employers has generated a renewed interest in salary sacrifice arrangements which involve the employee giving up a portion of salary in return for an employer provided benefit - the point being that the tax and/or NIC on the item being provided is often less than the deductions on the previous portion of salary, thus producing savings for both the employee and employer.

In the right circumstances, and implemented/operated correctly, salary sacrifice can be a very tax-efficient method of remunerating staff and to mitigate against the NIC increases. However, it is important to stress that these arrangements may not be appropriate for all businesses and there are certain aspects that can be problematic from an HMRC, legal or operational perspective if not addressed robustly at the outset. Care is therefore required to ensure that any salary sacrifice arrangement is fit-for-purpose so that it meets its desired objectives and avoids challenge from HMRC in the future.

Points to consider before implementing a salary sacrifice scheme

We outline below some of the key considerations for employers interested in such arrangements:

  • Tax and/or NIC savings are only possible on certain restricted benefits – ultra low emission vehicles, pension contributions, Cycle to Work and annual leave. Legislation invalidates tax and employer NIC savings for any other benefit provided in this way.
  • Salary sacrifice involves a legally binding change to contractual pay. Whilst the impact on internal pay-based policies and payments can be effectively managed, the reduced pay is the legally recognised pay for all external purposes. This means that any external payments, such as Government payments (e.g. SSP, SMP) or court orders, can be impacted. It is therefore important that employees fully understand the wider implications before signing up.
  • It is illegal to reduce an employee’s pay below National Minimum Wage levels and so salary sacrifice may not be possible for some employees.
  • There are complex legal rules to comply with, for example in relation to the provision of employment benefits under maternity law. This is more problematic in relation to salary sacrifice for cars or Cycle to Work.
  • The salary sacrifice has to involve a genuine change to contractual pay, and for this to be effective before any element of the pay is earned, for HMRC to accept it is a valid salary sacrifice. Any ambiguity on the contractual pay is likely to lead to HMRC challenge.
  • There are many operational aspects to address, including payroll system and payslip configuration, employee communications, contract changes, policy changes, tax reporting administration (cars), joiners/leavers, etc all of which can have an impact on the financial savings, overall complexity, and risk of HMRC challenge if not managed correctly.

Literature promoting salary sacrifice schemes will rarely highlight these challenges. Whilst it is usually possible to navigate all these areas with due care and attention, awareness and careful consideration of these aspects before pressing ahead with salary sacrifice, is essential for all employers. We are aware of HMRC successfully challenging these arrangements in several cases recently, leading to sizeable liabilities for the employer.

Get in touch

Our Employer Services team has extensive experience in this area and would be happy to discuss this further with any employer. Please contact me here in the first instance for more information, or your usual JC contact.

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