Salary sacrifice is an increasingly common arrangement between employees and their employers in the workplace. Although it’s not an entirely new concept, employers (and their employees) are able to take advantage of both tax and National Insurance Contribution (NICs) savings they can generate, causing a steady growth in the schemes popularity.
What is Salary Sacrifice?
Salary sacrifice is simply a way of paying employee benefits. This arrangement can only happen when there is a contractual agreement between employer and their employee who give up a part of their basic salary in return for a non-cash benefit.
Financially beneficial for both parties an employee’s entitlement to cash pay is reduced in return for non-cash benefits such as childcare and green travel. As long as your cash earnings don’t fall below minimum wage once exchanged for benefits you can qualify for the scheme.
Salary sacrifice is also a common way in which employers can manage pension contributions and other tax efficient benefits such as health assessments, additional annual leave and some insurances. The scheme is an excellent way of managing flexible benefits including those that would be taxable as a benefit-in-kind such as private medical insurance.
Take a look at the examples below which detail how you can benefit from both salary and bonus sacrifices.
Why Should I Consider Salary Sacrifice?
The scheme is generally seen as a short term direct cost savings in the form of reduced National Insurance payments. Even after taking in to account the potential costs and processes of implementation, communicating with the relevant parties and actually administering the scheme, the potential size of savings certainly outweighs it all.
Salary sacrifice is a fantastic solution for expanding and adding value to the range of benefits on offer whilst employers are able to support key aspects of their employee’s work-life balance in areas such as childcare, green travel and retirement.
For employers the more their staff’s salary the more they have to pay in National Insurance Contributions. Therefore by opting for benefits in return for a small salary cut employers, and employees alike will undoubtedly save money.
What Do You Need To Do?
Since the scheme causes a change to the terms and conditions of employment and can have significant tax advantages there are certain requirements need for HMRCs approval. As well as generally ensuring that everything is well communicated and administered to allow for employee engagement and the generation of maximum savings, you will need to follow these guidelines:
- Timing of agreement – the arrangement cannot under any circumstances be back dated and must be laid out for a reasonable period of time. On the whole, this is generally accepted as one year.
- Evidence of change – HMRC have set out specific guidelines for the ways in which the variation to terms and conditions can be evidenced which you must follow. You must also report changes to HMRC at the end of the tax year using forms P11D and P9D
- Enrolment opportunities – Although there are some benefits which are completely exempt, others need to be tightly controlled.
You should not change the agreed terms of a salary sacrifice arrangement unless they comply with specific circumstances where an employee’s financial circumstances change. This would include marriage, divorce, or a spouse or partner becoming redundant or pregnant. It is only when these lifestyle changes occur that you are able to opt in or out of the scheme. Don’t forget any changes must be made to the contract and HMRC made aware.
You should also be aware that salary sacrifice can affect the amount of statutory pay an employee receives and may cause some to lose their entitlement altogether. If a salary sacrifice reduces the employees average weekly earnings below the lower earnings limit then you will not be required to make any statutory payments to them.
When part of a salary shifts from cash value to non-cash benefits where certain taxes and National Insurance Contributions were due, you can benefit from being wholly or partially exempt. This however, is dependent on the salary and non-cash benefits which make up the salary sacrifice arrangements. As an employer make sure you are aware of the tax and NICs rules that apply and implement them correctly. You must also ensure that you satisfy any conditions that apply to the exemptions. For example if a benefit has to be made available to all your employers in order for it to be exempt, this condition must be fully satisfied, whether or not all employees have a salary sacrifice arrangement with you.
Need A Hand?
Despite some administrative challenges and ensuring that you follow the correct guidelines, salary sacrifice can be an excellent addition to your business, for both employee and employer. If you need additional information and advice concerning the scheme, don’t hesitate to give us a call on 0117 379 0810
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Categorised in: Industry News
This post was written by Fran Tyler