Auto enrolment staging dates are fast approaching… Could a salary sacrifice scheme be the most effective way to deliver tax savings for you and for your employees?
Salary sacrifice takes place when an employee gives up the right to part of their remuneration in return for some sort of non-cash benefit from their employer. The government announced in the 2016 Budget, that it is considering putting limits on the range of benefits that attract income tax and National Insurance advantages when provided as part of a salary sacrifice arrangement.
However, we understand that the intention is for pension savings, childcare and health-related benefits to continue to attract these reliefs. Therefore, an option might be for employees to sacrifice part of their salary in return for the employer paying a sum to a registered pension scheme for the employee’s benefit.
The right way to set up a salary sacrifice scheme
The recent Reed Employment tax case highlighted that it can be costly to implement a salary sacrifice scheme if you don’t do it the right way. To be effective, the arrangement has to reduce the employee’s contractual right to cash remuneration. This requires these two conditions be met:
1. The employment contract must be effectively varied before the changes are implemented i.e. the employee must give up their salary before they are entitled to receive the remuneration
2. The revised contractual arrangement must show that the employee is entitled to lower cash remuneration and a benefit.
In addition, the employee should not have the right to give up the non-cash benefit and revert to the higher cash salary within 12 months.
In practice, the variation of the contract can be achieved by re-writing the contract, setting out the changes in a separate document attached to the contract or by giving employees an ‘opt out’ option. The ‘opt out’ clause would specify a time limit for employees to opt out of the salary sacrifice arrangement. Failure to do this would be regarded as an ‘opt in’. It is important that employees are kept fully informed of the proposals.
Further conditions state that the cash wage following salary sacrifice can not fall below rates set in the National Minimum Wage and the National Living Wage. Salary sacrifice can also affect an employee’s entitlement to certain state benefits such as Maternity Allowance and Incapacity Benefit. Consideration should be given to excluding lower paid employees from the scheme.
Using a salary of £30,000 and 2016/2017 tax rates. An employer contribution of 2%, employee contribution 4% before tax relief.
|Employee’s net pay||£||£|
|Pension contribution (net of tax relief)||(960)||(NIL)|
|Employer’s pension contribution||(600)||(1,800)|
|Total cost to employer||33,621||33,455|
|Total pension contribution||1,800||1,800|
The employee’s net pay would increase by £144 and the cost to the employer would fall by £166.
Benefits of successful salary sacrifice
Where salary sacrifice is implemented with a pension payment being provided by the employer, the employee will pay income tax and NICs on the lower cash salary. There will be no charge to income tax or NICs on the amount of the pension payment made by the employer.
The effect of using salary sacrifice for employee’s pension payments would therefore be a saving of up to 12% for the employee and up to 13.8% for the employer.
HMRC does not comment or advise on any proposed salary sacrifice arrangements; it is not their remit to become involved in employment agreements. They will, however, give assurance once the arrangements for the scheme are in force (for HMRC to do this they require sight of all relevant documentation).