Latest developments with salary sacrifice
Prior to 6 April 2017, a salary sacrifice arrangement would have lowered the amount of tax and national insurance deducted from the employee. There were also financial benefits to the employer, depending on whether the non-cash benefits were wholly or partly exempt from tax and national insurance contributions.
From April 2017, the government removed tax and employer national insurance advantages of salary sacrifice schemes, except for arrangements relating to pensions, childcare, cycle to work, and ultra-low emission cars with emissions under 75 grams of CO2 per kilometre, to incentivise the take-up of these vehicles.
Employees who were enrolled in a car, accommodation or school fee salary sacrifice arrangement before 6 April 2017 can continue to receive this benefit until the end date of their agreement, or until 5 April 2021, whichever is sooner. Any other salary sacrifice arrangement will no longer attract this benefit and will be subject to tax and national insurance contributions.
More detailed information on salary sacrifice arrangements can be found on the HMRC website.
What is a salary sacrifice arrangement?
A salary sacrifice arrangement is an 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. Examples of this include:
- Childcare vouchers
- Cycle to work scheme
- Car hire/lease scheme
- On-site nurseries
- Car parking*
- Gym membership*
- Home computers*
- Pre-paid store cards*
- Personal learning*
* No longer attract tax and national insurance benefits.
Employer-supported salary sacrifice schemes for childcare vouchers closed to new applicants on 5 October 2018. Employees who were already enrolled in a scheme before this date may continue to receive this benefit as long as their circumstances remain the same. The government tax-free childcare scheme may be available to parents and more information can be found on the gov.uk website.
Impact of the national living wage
Salary sacrifice schemes have the potential to reduce staff earnings to below the appropriate minimum income. If you pay your staff less than the national minimum wage, or national living wage for employees over the age of 25, you must make up any shortfall. You may be fined up to £20,000 by HMRC for each non-compliant employee.
We recommend that employers operating salary sacrifice arrangements should review them to ensure compliance with the minimum income requirements. It is good practice for employers to continue to monitor their salary sacrifice arrangements on an ongoing basis, and in particular; when an employee joins a salary sacrifice arrangement for the first time; when a new salary sacrifice scheme is introduced; each April when the national living wage rates are reviewed; and each October when the national minimum wage rates are reviewed. The current national living wage and nation minimum wage rates are available on the gov.uk
Implications for members of the NHS Pension Schemes
There are some specific implications of entering into a salary sacrifice arrangement for members of the NHS Pension Schemes.
Forgoing a cash benefit for a non-cash benefit reduces the amount of take home pay. 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 employees pension contributions. 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. However, please note a large increase in pensionable pay before retirement may result in an employer charge under a final pay control. You can visit our salary sacrifice and 2015 Scheme web page for more information.
There are number of things that employees may consider before entering into a salary sacrifice arrangement, including:
- cost of the arrangement
- how the arrangement compares with what the individual could buy themselves
- potential savings
- impact on future pension if they are a member of a defined benefit scheme, such as the NHS Pension Scheme
- how vital the arrangement is to the individual being able to work, such as childcare vouchers.
Employers may consider a number of factors before making salary sacrifice arrangements available, including:
- financial considerations such as cost, cost neutrality, or savings
- administration and communication resources
- reward, recruitment, and retention strategies and how this fits with the overall approach to reward
- legislation, governance, and compliance with tax rules
- whether you need to update your policies and procedures
- what your workforce want, and how this differs between demographics.