Salary sacrifice arrangements involve an employee giving up part of their salary or bonus entitlements, which would be subject to income tax and/or National Insurance Contributions (NICs). In exchange, the employer provides the employee with a non-cash benefit which is often free of tax, NICs, or both.
How does a salary sacrifice it work?
- The employee must give up the right to receive a portion of salary before they are entitled to receive the benefit in its place. Employers cannot require employees to participate in salary sacrifice schemes.
- HMRC requires that for it to be a true salary sacrifice, there must be a legal variation of the employee’s contractual terms. There is more than one way to achieve this including via an opt out process. It is key to inform employees fully on how agreeing to a salary sacrifice arrangement will impact them.
- Participating in a salary sacrifice scheme will result in their salary being reduced. This reduced salary will affect an employee’s entitlement to statutory pay among other things. Consideration of a notional or shadow salary is therefore an essential part of salary sacrifice planning.
When are salary sacrifice arrangements commonly used?
- Flexible benefit schemes – here, an employee foregoes a salary in exchange for selected non-cash benefits (e.g., childcare vouchers, low emission cars, cycle to work schemes).
- Conversion of contributory pension schemes to non-contributory pension schemes – this aims to achieve NICs savings.
- To save NICs when employees wish to increase their pension contributions or benefits.
- Where there is a benefit to the employer in purchasing goods or services in bulk and obtaining a discount on the price that the employee would be able to obtain – e.g., gym memberships.
Duration of salary sacrifice arrangements
- Some benefit schemes may require employees to sign up for a minimum amount of time, e.g., company car scheme, while other schemes allow for more flexibility.
- HMRC advises that any arrangements for 12 months or more will likely be accepted as a true sacrifice. Anything less could result in the benefit being taxable (which also depends on whether the benefit is exempted from tax).
If you are an employer wanting to find out more about salary sacrifice arrangements, contact Aimée Johns on 0116 402 7252 or email aimee.johns@bhwsolicitors.com.