Especially in the current economic climate with our belts already tightened, the mere mention of a reduction in salary would give cause for grave concern, adding further financial hardship to an already over-stretched household budget. But should this be a concern when the sacrifice refers to a salary sacrifice scheme offered by their employers.
A salary sacrifice occurs if an employee contractually agrees with their employer to give up part of their salary (cash remuneration) in return for the employer agreeing to provide the employee with a non-cash benefit. The benefit to the employee is the possibility of a reduced liability to both tax and NICs (employers can also benefit due to a reduced NICs liability).
Historically the phrase salary sacrifice mainly referred to an employee agreeing to a ‘salary’ reduction in return for the employer increasing their pension contributions to the employee’s pension fund. The employee would then cease their own pension contribution which would offset the original reduction in salary. The incentive for the employee is the reduced salary which can lead to tax and NICs savings and therefore an increased ‘net’ take home pay.canada goose jakker
Nowadays the term salary sacrifice simply refers to any arrangement where an employee contractually agrees with their employer to receive a reduced wage in return for a benefit in kind.
Sound simple? It can be but there are conditions to the sacrifice arrangement that the employer needs to consider, failure to do so may lead to compliance issues with HMRC. The term salary sacrifice forms part of employment law and not tax law, HMRC do not approve salary sacrifice schemes, instead they issue many guidance notes on how a scheme should be structured. The onus is on the employer to satisfy themselves and HMRC if audited that their scheme is compliant with the HRMC guidance notes issued.
Guidance Notes when setting up a Salary Sacrifice Scheme
1. Employment Contract
It may be necessary for the employer to change or vary the employee’s contract defining the sacrifice agreement. This will evidence the fact that the employee agreed to a reduced remuneration before it is physically received and was replaced with a non-cash benefit. The employee’s contract can be amended to reflect the change or defined in a separate document that is then attached to the contract.
Another acceptable method is to inform all employees of the proposed changes and rather than requesting employees to ‘opt in’ instead the employer states that the workforce will be set to ‘opt in’ unless they physically ‘opt out’. The employer in this case must issue a date to all employees by which time the ‘opt out’ must be made. For this method to be legally binding the employee needs to continue working after the ‘opt out’ date and have continued to work after the first pay-day following the changes, without protest.
2. National Minimum Wage
Employers must observe the national minimum wage (NMW) currently in force. If the employee’s salary was equal to or greater than the NMW prior to entering the sacrifice agreement but fell below the NMW as a result of operating the sacrifice, the employer cannot enter the employee into the sacrifice agreement.
3. Statutory Payments
There can be situations when employees could lose out on statutory benefits. SSP, SMP, OSPP, ASPP or SAP are only payable if the employees average weekly earnings are equal to or above the Lower Earning Level (currently £107 per week). Employees entering in to a sacrifice arrangement with their employer needs to be mindful of this as the sacrifice could reduce the salary to a point where it affects the value or even prohibits entitlement to statutory payments.canada goose jakker
4. Agreement Period
In practice the benefit in kind made available via the sacrifice scheme should be in place for a period of no less than 12 months. Reverting back to a non-sacrifice agreement is acceptable in the eyes of the HMRC prior to 12 months elapsing without incurring tax and NICs liability only if the employee’s financial circumstances change unexpectedly. HMRC have defined this as a ‘lifestyle change’. Examples of a lifestyle change are marriage, birth of a child, divorce and redundancy.
5. Special Benefits
Certain benefits can be varied each pay period without breeching the sacrifice agreement and will not be subject to compliance investigation or deemed to be an unsuccessful sacrifice; these are car parking within the workplace, bicycle and associated safety equipment, childcare vouchers, workplace nurseries or childcare provision contracted by the employer.
6. Pay Advice Statement
The employer is obligated to show the sacrifice clearly on the employees pay statement. The pay statement can be used in compliance cases as evidence that the sacrifice arrangement is being operated correctly. In the early days of salary sacrifice HMRC required that only the reduced salary should be shown per pay period. This requirement has been removed as HMRC realise that some payroll software suppliers were unable to hold the new salary after sacrifice and the pre sacrificed salary amount sometimes known as the notional salary for working out overtime rates etc.
It is now acceptable to show either the reduced salary after sacrifice or the pre sacrifice salary and a negative sacrifice amount. It is important that if you choose to hold both the full salary and the sacrificed value, the sacrificed value is shown as a negative and appears within the payments section on the payslip and not the deductions section of the payslip.
Salary Sacrifice and Pensions Auto-enrolment
The recent introduction of Auto-enrolment has meant the cost of employing people has risen for many employers. In addition to employee contributions, the work involved with administering, monitoring and implementing auto-enrolment will also increase costs. Salary Sacrifice is therefore proving an attractive option as a way of mitigating part of this additional cost.
The use of salary sacrifice with auto-enrolment benefits both the employer and employee. By converting the employee pension contribution into salary sacrifice the employer contribution is enhanced and the employee saves both tax and NICs.
For many employees, if a salary sacrifice arrangement is made available by their employer, it could be financially worthwhile opting in. There are tax and NIC savings to be made by both the employee and the employer. Given the introduction of auto-enrolment, there seems to be a trend where more and more employers look to offer a salary sacrifice scheme as a means of offsetting costs associated with the setting up and administration of auto-enrolment.
Employers do need to be aware of the guidance notes issued by HMRC and structure their scheme to ensure compliance as well as making sure the payroll software in use can produce the employee pay statements that conform to the HMRC requirements.
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