Salary sacrifice arrangements are agreements that reduce the amount your employee gets as cash remuneration in return for some sort of non-cash benefit.
The number of benefits that can be provided free of income tax and National Insurance Contributions (NICs) under salary sacrifice schemes has been steadily eroded in recent years. The prime advantage is broadly now restricted to: employer pension contributions to approved schemes, pensions advice, cycle to work schemes, qualifying low emission cars and certain specific childcare provision.
With these particular benefits, reducing gross pay through salary sacrifice can reduce employee NICs and income tax liability. For you as employer, there should also be a saving in employer NICs. You can of course offer benefits other than these, but the advantage is likely to accrue from group purchase discounts for things like gym facilities, rather than tax or NICs savings.
Tip: Make sure you remain minimum wage compliant when setting up any salary sacrifice arrangement. Check that the arrangement doesn’t take cash earnings below the relevant minimum wage rate.
Salary sacrifice arrangements are based on the idea that the employee has permanently given up the right to part of their salary; the terms of the sacrifice, and details of the non-cash benefit received in exchange, are formally set out in the employment contract. In practice, arrangements tend to apply for a minimum period, usually a year.
However, the need for permanence obviously creates an issue if you are asked to alter the arrangement. As a general rule, if an employee swaps between cash earnings and a non-cash benefit at will, any expected tax and NICs advantages are at risk. HMRC does acknowledge, however, that in some circumstances, a salary sacrifice arrangement can be varied or discontinued without adverse effect. This exception is for ‘lifestyle’ events:
HMRC has also now expanded the list to include changes to circumstances directly arising as a result of the pandemic.
When varying a salary sacrifice arrangement, the employment contract is key. To change the terms of the salary sacrifice agreement, the employment contract must be changed first; it should set out clearly entitlement to cash salary and non-cash benefit at any given time.
With HMRC’s emphasis on the employment contract being varied before changes are implemented, and the right to salary being given up before an employee is entitled to receive the remuneration, this is an area to get right first time. We are always happy to advise on salary sacrifice or any other aspect of tax efficient remuneration.