Salary sacrifice is an agreement between an employer and employee to reduce the employee’s cash salary entitlement, usually in exchange for a non-cash benefit – think of it as swapping salary for something else. This happens as part of a change to the employee’s contract.
How does this save money?
Shifting remuneration from cash to non-cash benefits can remove the PAYE and National Insurance (NI) liability on the amount shifted. The employee saves tax and NI, and the employer saves NI – there are savings for both parties, which can be substantial and are certainly not to be too eagerly dismissed.
What types of benefits can currently be effectively provided through salary sacrifice?
Common types are:
- Employer supported childcare (see our recent blog on this specific subject here)
- Cycle to work scheme
- Mobile phones
- Car parking
Is this too good to be true?
My Dad always used to say to me “if it sounds too good to be true, it probably is” – in this case it’s “yes” and “no”. The Government are aware that salary sacrifice schemes have been used in the past for all sorts of things that aren’t really the intended use. They are currently consulting on removing the tax and NI advantage for certain salary sacrifice arrangements. They want to encourage employers to provide certain benefits, therefore the proposed changes are not set to affect employer provided pensions, employer supported childcare, or cycles/cyclist safety equipment – these are set to stay for the foreseeable future.
Things to consider
- A salary sacrifice arrangement can’t reduce an employee’s cash earnings to below the National Minimum Wage
- Earnings related payments, such as overtime rates and payrises etc can be based on the notional salary or the new reduced cash salary – this must be made clear to the employee
- Salary sacrifice reduces the amount of pay that is subject to NI and could affect an employee’s entitlement to contribution-based benefits such as Incapacity Benefit and State Pension, statutory pay such as Statutory Sick Pay and Statutory Maternity/Paternity/Adoption Pay and tax credits
- Check with your pension provider or financial advisor that your workplace pension scheme allows salary sacrifice
For more information on salary sacrifice, just click here https://www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye or contact us on 0116 242 3400.
Katie Kettle, Technical Manager