03 / 5 / 2016 11.58am
The information below provides employers with an overview of salary sacrifice including:
What is a salary sacrifice arrangement?
A salary sacrifice arrangement is a locally offered agreement between an employer and an employee where the employee gives up some of their contractual entitlement to cash earnings in return for non-cash benefits.
Salary sacrifice arrangements can also lower the amount of tax and national insurance contributions deducted from the employee and paid to HMRC.
In some instances, a salary sacrifice arrangement is financially beneficial to both employer and employee, dependent on the specific package and whether the non-cash benefits are wholly or partly exempt from tax and national insurance contributions.
Salary sacrifice examples include:
||Cycle to work scheme
||Car hire/lease scheme
||Pre-paid store cards
There are number of considerations for employees, examples of these are:
- the cost of the salary sacrifice arrangement
- how the arrangement compares with what the individual could buy themselves
- the potential savings
- the impact on future pension if they are a member of a defined benefit scheme, such as the 1995/2008 Scheme and the 2015 Scheme
- whether the salary sacrifice arrangement is viewed as being vital to them working e.g. childcare vouchers.
There are a number of considerations that employers need to be aware of, examples of these considerations are:
- financial considerations including cost, cost neutrality or savings to the organisation
- resources including associated administration and communication
- reward, recruitment, retention strategies and how this fits with the overarching approach to reward
- legislation, governance and compliance with tax rules
- policies and procedures (do these require updating or amending following the introduction of a salary sacrifice arrangement?)
- research – demographics of the workforce, what the workforce values and whether your offering aligns with what your workforce wants.
Implications for members of the NHS Pension Schemes
Forgoing a cash benefit for a non-cash benefit reduces the amount of take home pay. Salary sacrifice arrangements can also lower the amount of tax and national insurance contributions deducted from the employee. In a CARE pension scheme, like the 2015 Scheme, pension benefits are built up on a year by year basis. Any change to a members salary in each year (such as salary sacrifice), will have an impact on the individuals gross pensionable pay. Entering into a salary sacrifice arrangement that reduces gross pensionable pay will mean that reduced benefits are built up for that period. In a final salary pension scheme, such as the 1995/2008 Scheme, salary sacrifice will not have an impact on the value of the individual's pension benefits if the member opts out of the salary sacrifice arrangement before retirement. You can find out more information on our salary sacrifice and the 2015 Scheme web page.
Impact of the new living wage
Salary sacrifice schemes have the potential to reduce staff earnings to below the appropriate minimum income. The government's new national living wage (NLW), introduced from 1 April 2016, is significantly higher than the existing national minimum wage (NMW) and this means that staff who were earning over NMW may now earn less than NLW, once salary sacrifice deductions are taken into consideration. If you pay your staff less than the new NLW, you must make up any shortfall and you may be fined up to £20,000 by HMRC for each non-compliant employee.
Staff aged 25 and over (except those in the first year of an apprenticeship) are now legally entitled to earn at least £7.20 per hour. The NLW will rise to £9 per hour by 2020. The existing NMW will continue to apply to staff aged 24 and under. The current NLW and NMW rates can be found on the HMRC website
All employers operating any salary sacrifice scheme should review their arrangements to ensure compliance with the new minimum income requirements. It is good practice for employers to continue monitor their salary sacrifice arrangements on an ongoing basis, and in particular:
- when an employee joins a salary sacrifice arrangement for the first time
- where a new salary sacrifice scheme is introduced
- each April when the national living wage rates are reviewed
- each October when the national minimum wage rates are reviewed.
Upcoming changes to childcare vouchers
In 2017, the current provision of employer supported childcare will be replaced by tax free childcare which will be administered through online childcare accounts provided by National Savings and Investments (NS&I). You can find out more information on our childcare vouchers web page.
VAT and salary sacrifice
Below is a summary of the impact on employee benefits which are commonly operated on a salary sacrifice arrangement:
- Cycle to Work Scheme – VAT is due on the value of the salary foregone by the employee in exchange for the loan of a bicycle. HMRC have advised that NHS trusts can claim back the VAT element of invoices as input tax, with trusts needing to account for the VAT on the salary sacrifice payments as output tax. Cyclescheme have produced some useful FAQs on this subject.
- Face value vouchers – Input VAT can be claimed on the purchase of the vouchers but an equivalent output VAT charge is also due. The VAT position is therefore neutral.
- Childcare vouchers – No VAT is chargeable as the vouchers in question are not subject to VAT. The Government has published its response to a consultation on delivering tax-free childcare and we look at the implications for employers on our web page.
- Food and catering provided to employees – If food is provided free of charge to employees then no VAT is due. If the employee pays for meals, etc. by way of a salary sacrifice then VAT is due, if the supply is one that would ordinarily attract VAT.
- Benefits provided to all without payment – If, for instance, a gym is made available for the use of all staff then no VAT is due as long as there is no deduction from salary or other payment made. The business can recover the VAT on the costs associated with providing this facility subject to the normal rules associated with overhead VAT recovery.
- Cars – If cars are made available to employees then no VAT is due, as long as the business is restricted in the VAT that it can recover on the purchase or lease of the vehicle.
More detailed information on salary sacrifice arrangements can be found on the HMRC website.