Salary sacrifice schemes

What is a salary sacrifice arrangement?

A salary sacrifice arrangement is an agreement between an employer and an employee to reduce an employee's entitlement to cash pay in return for a non-cash benefit.

Examples of this include:

Note: some benefits no longer attract tax and employer national insurance (NI) relief. This is covered in more detail in the individual sections below.

More detailed information on salary sacrifice arrangements and individual benefits can be found on the HMRC website.

Interaction between salary sacrifice and the NMW

As salary sacrifice benefit arrangements involve the employee agreeing to a lower salary in exchange for a benefit, the change to their contractual pay can potentially reduce an employee’s earnings to below National Minimum Wage (NMW).

Employers are required to pay important attention to the pay an individual will receive after the reduction to pay under the salary sacrifice arrangements to ensure that they remain compliant and don’t breach the NMW regulations.  

It is important to consider the total of all the salary sacrifice benefit reductions in addition to any other deductions from pay for each individual employee. If staff earn less than the NMW, or NLW for employees over the age of 21, this will mean that as an employer you were non-compliant. 

Employers could be faced with a number of penalties as a result of being non-compliant with the NMW legislation including: 

• being fined up to £20,000 by HMRC for each non-compliant employee 
• being ordered to pay any NMW underpayments to current and former workers (dating back up to six years) 
• the potential for criminal sanctions 
• reputational impact – the names of non-compliant organisations can be passed onto the Department for Business and Trade who may put this on a public list
• subject to investigation – any reports made by employees/former employees are investigated by the Fair Work Agency and can take a considerable amount of management time to resolve.

We have a dedicated web page where you can find out more information about the NMW including the interaction with salary sacrifice schemes and how employers can ensure they calculate NMW correctly.

Cycle to work scheme

The NHS Net Zero Travel and Transport Strategy outlines that organisations should support staff to shift to less carbon-intensive modes of transportation such as public and active travel. Most NHS organisations offer cycle to work schemes as part of their employee benefits package. The scheme is run via a salary sacrifice arrangement, meaning staff can be provided with a bike and/or cycling accessories as part of their remuneration package whilst making tax and NI savings from their gross pay each month. 

As the cycle to work benefit is not subject to the optional remuneration arrangements (OpRA) rules which were introduced in 2017 by HMRC to remove the tax effectiveness of certain salary sacrifice benefits, in addition to the tax and NI benefits the employee receives, the employer also saves employer Class 1 NIC.   

NHS organisations may wish to identify a cycle to work scheme lead so that more staff can make use of this option. 

It should be noted that after the end of the 12-month salary sacrifice period, the employee does not “own” the bike. The options available for the employee after the end of the 12-month initial hire period will be communicated by the cycle to work scheme provider. 

Car hire/lease schemes

Most NHS organisations offer salary sacrifice arrangements for car leasing. This scheme allows staff to drive a brand-new car of their choice on a pre-agreed lease period which is entered into by the employer. Insurance, road tax, MOT, servicing, maintenance and repairs and breakdown assistance are often included within the monthly salary sacrifice arrangement. 

Where the car chosen by the employee is a low emission vehicle (75g/km of CO2 or less) the employee will benefit from tax and NI advantages (as will the employer). There will, however, be some tax to pay on the provision of a company car which is available for the employee’s personal use. The taxable benefit (which is either declared on a form P11D or payrolled) is based on the original list price of the vehicle and a benefit percentage based on the emissions and in the case of a plug in hybrid vehicle the range of the car when run purely in the electric battery. 

The car benefit provider will be able to give more details and/or a benefit calculator, however, HMRC also provide a benefit calculator.

It should be noted that if an employee chooses a car with emissions that are higher than 75g/km there will be no tax or NI savings. As a result, many employers operating these arrangements will only include battery electric vehicles or plug in hybrids in the scheme.

Home electronics/white goods

Technology salary sacrifice schemes allow staff to choose to be provided with electrical devices and goods such as: 

• computers (tablets, desktops and laptops) 

• smart TVs 

• mobile phones 

• white goods such as fridges, freezers, and washing machines.

The cost of these items will reduce the employees contractual pay and are spread over a pre-agreed contract length. NHS organisations often partner with a range of external suppliers to provide these benefits for staff.

There will be a taxable benefit arising from this type of arrangement which will need to be reported on form P11D (or payrolled). The level of benefit will be dependent on factors such as the contract length and the arrangements at the end of that contract for transferring the asset to the employee. 

Tax-free childcare

The government tax-free childcare (TFC) scheme was introduced on 28 April 2017 and will eventually replace employer-supported childcare schemes (ESC). We have put together key information on TFC for employers including how this affects employees in any current ESC schemes operated. 

Key facts about TFC

• TFC is administered through online accounts, opened by parents on the GOV.UK website. Parents pay money into the account, which is used to pay for childcare with registered providers. Parents can pay money into their childcare account as and when they like, and other parties can also pay in.
• For every £8 paid in, the government will add £2, up to a maximum of £500 every three months, and up to £2,000 government support per child, per year. This is increased to £4,000 for children with disabilities.
• The scheme is open to parents of children up to and including the age of 11 (12 for children with disabilities). This is lower than current ESC which is available for children up to 15 years of age.
• Employees can get tax-free childcare at the same time as 15- or 30-hours free childcare if they're eligible for both.

The role of employers in TFC

There is no mandated role for employers under TFC, but you may choose to provide information to your employees. This will be a predominantly signposting role, directing employees to the childcare account website and where to register. Employers will not be required to verify identification or eligibility.

Child Benefit: the government also offers parents and carers up to £27.05 per week to help them with the costs of raising their first child, and up to £17.90 per week for any additional children. You may wish to signpost employees to GOV.UK's online services to check eligibility and make a claim. Families can download the HMRC app for further support.

Parents/carers cannot use tax-free childcare and workplace salary sacrifice schemes, such as childcare vouchers or workplace nurseries together. They can choose to remain in their existing ESC arrangement or move to TFC. This decision will depend on which option is best for their individual circumstances. You may wish to direct your employees to the childcare calculator to help with making this decision.

Employer-supported childcare (ESC)

Employers in the NHS can currently provide ESC through schemes such as childcare vouchers, and workplace nurseries. 

Childcare vouchers

Workplace salary sacrifice options for childcare vouchers closed to new entrants in October 2018. 

Employers offering childcare vouchers through salary sacrifice arrangements can therefore no longer accept new applications to a scheme. Employees who registered for childcare vouchers through their employer before 4 October 2018 can continue to use the scheme as long as the employer continues to offer it and their child remains eligible. Employees are continuing members of a scheme provided they do not have more than 52-consecutive weeks without receiving childcare vouchers. 

If an employer received new employees after 4 October 2018 under a business transfer covered by Transfer of Undertakings (Protection of Employment) rules, these employees were entitled to retain their terms and conditions; if they were in a childcare voucher or directly contracted childcare scheme before the transfer, they can join your existing scheme, or a new one can be started. 

As childcare vouchers are being phased out, you may need to review your flexible working offering and consider what else you could do to support working parents/ carers and ensure your total reward offering is still family friendly. You may wish to consider introducing other family friendly benefits into your organisation and you will need to look at the cost implications of offering these. One option may be choosing to pay in to an employee's TFC account, either as an additional payment, or by facilitating payments from their salary. Remember though that any contribution towards TFC from an employee's salary must be from net earnings, therefore, after tax, to avoid them receiving a tax benefit twice. Contributions made to a TFC account do not reduce pay for NMW compliance purposes. 

Workplace nurseries and directly contracted childcare

Employers providing workplace nurseries can continue to do so, and employees will still be able to join a workplace nursery scheme offered by their employer. Given that more employees will be using TFC to pay for their childcare provider, this may impact how your workplace nursery is funded.

Where workplace nursery arrangements involve commercial third-party providers providing these arrangements, HMRC are likely to look carefully at the arrangements and may challenge them. You may need to consider taking specialist advice to ensure that your scheme is compliant. 

Both workplace nurseries and childcare vouchers are tax efficient benefits which can be provided tax and NIC free. They are not subject to the OpRA rules introduced in 2017. 

Further information

You can find out more about tax-free childcare on the GOV.UK website and on the Childcare Choices government website.

Implications for members of the NHS Pension Scheme

There are some specific implications of entering into a salary sacrifice arrangements for members of the NHS Pension Scheme. 

Forgoing a cash payment for a non-cash benefit reduces the amount of take-home pay, which in turn reduces the amount of pensionable pay on which pension contributions and benefits are calculated. In a career average revalued earnings (CARE) pension scheme, like the 2015 Scheme, pension benefits are built up on a year-by year-basis. Employers should ensure that their salary sacrifice communications clearly explain the impact on an employees’ pension contributions. Any change to a member’s salary in each year (such as salary sacrifice), will have an impact on the individual’s 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. However, please note a large increase in pensionable pay before retirement may result in an employer charge under a final pay control.