Anything to do with tax seems to be something that confuses many employees and employers alike. One of the government schemes set up to help employees save money is called Salary Sacrifice scheme. In simple terms it allows employees to save money by paying for things directly from their salary before paying tax. The benefits that fall within the scheme are: Payments into a pension scheme; Employer provided Pension advice; Workplace Nurseries; Childcare Vouchers, Car leasing and Bicycles and cycling safety equipment. In this article we will try to explain Salary Sacrifice in simple terms and answer some of the questions you might have, like: what is it? how does it work? is it beneficial for me?
What is Salary Sacrifice:
Salary Sacrifice is when an employee agrees to give up part of their salary towards something that will benefit them. Not only that the money used for that benefit is taken from the employees’ gross income, which means that it’s non-taxable.
As well as reducing an employees Income Tax it also reduces their National Insurance Contributions and there is no need to claim any tax relief from HMRC because the savings are instant. This makes salary sacrifice such a well-liked way for people to:
Save for retirement
Pay childcare costs
Leasing a car
Or buy a bike.
First of all, there will need to be a discussion between the employer and employee to determine the benefits that are available and how much salary the employee would like to sacrifice in return for the agreed benefits. Once the arrangements are confirmed the agreed amount is taken from the employees’ gross salary, before Income Tax and National Insurance is calculated. Since the salary Sacrifice amount is not taxable both the employee and the employer both save money on the payments.
Once everything is in place, the employee will be able to access the chosen benefits. Start planning for their retirement, go for a drive in their company car or go shopping for a new bike.
SOMETHING TO NOTE:
Not all employees will be eligible for Salary Sacrifice, be careful to ensure that any deductions do not take employees below *National Minimum Wage, also, there could be an impact on certain benefits for some employees like statutory sick pay or redundancy, so this must be considered prior to proceeding.
*We have had scenario’s where Salary Sacrifice has taken an employee’s salary below minimum wage. Since this is against the law, the employer had to backdate a salary increase and backpay the increase to the employee. Obviously, this can be an expensive mistake to make if it has been in effect for any period of time.
There are many companies that can offer options for Salary Sacrifice Schemes. As an employer you will need to explore the providers that fit with your needs and requirements. Some of the benefits that are the most popular are:
Pension Salary Sacrifice:
This is the most common use of Salary Sacrifice, where the employee can choose to make pension contributions as part of the Salary Sacrifice Scheme.
This means the employee’s salary is reduced by the amount of pension contribution they want to make and the employer pays that money into their pension on their behalf. Since the employee earnings have been reduced there is less National Insurance to pay, for both employee and employer.
Some companies may also choose to pass these savings onto their employee’s pension contributions too, giving their pension fund an extra boost.
As of 2021, the standard pension contribution in the UK is 8% of an employee’s earnings. This should be made up of a minimum contribution of 3% from the employer and a minimum of 5% from the employee.
That said, many companies nowadays choose to pay more generous pension contributions than the standard 3%. In the UK, a total pension contribution of between 10-15% is considered generous.
Some employers offer to match employee contributions, and others offer a set contribution rate that is higher than the minimum e.g., 12% overall.
Vouchers can be used to pay for registered childcare and can be received tax-free up to a maximum of £243 per month, per eligible parent, (depending on their tax band). The cost of childcare is taken from the employees’ gross salary and either paid direct by the employer or paid into their Childcare Voucher account.
This means that employee will save tax and national insurance on their childcare costs and could potentially save a maximum of £77.76 each month (£933 in a year), or double, if both parents sign up for a Childcare Voucher scheme.
Please note: To qualify for childcare vouchers the child must be under 15 years of age (until 1 September following their 15th birthday) or if the child is disabled, under 16 years (until 1 September following their 16th birthday) and the childcare provider must be registered or approved.
The Government have set up a Bike2Work Scheme which allows Employees to sacrifice part of their salary to buy a bicycle and cycling accessories. The other advantages are that employees get and stay healthy, hopefully reducing time off through sickness, it helps the environment by cutting down on their carbon footprint and it also reduces the company’s NI contributions.
To be eligible for the scheme you must be over 16 years of age and employed as a PAYE employee. No credit check is required for you to take part, however if you are under the age of 18, you will need the signature of a guardian on your guarantor agreement.
Employers must be registered with the Bike2Work scheme you can find the application on the following link: https://www.bike2workscheme.co.uk/
Be aware that earnings should not drop below the National Living Wage (NLW) or National Minimum Wage (NMW) following the deduction of the salary sacrifice amount from your gross salary. Employers must put procedures in place to cap salary sacrifice deduction and ensure NMW rates are maintained.
If you are affected by this guideline, you can contact the Bike2Work Scheme or your HR manager to discuss other available options.
Company car schemes:
Some employers may offer salary sacrifice schemes for car ownership. The car is usually leased by the employer on behalf of the employee.
A salary sacrifice car scheme can be worth it for some employees, as with most salary sacrifice schemes, it can result in a reduction in the amount of Income Tax and National Insurance they pay.
In a car salary sacrifice scheme, the employer leases a car on behalf of the employee. The employee repays the lease payments from their gross salary, ie: before tax and NI is calculated, usually over a 2–4 year period.
As a rule, the car will be leased through a qualified leasing company, the lease costs will generally include insurance, maintenance, and secondary running costs. The employee will be responsible for fuel costs and any extra charges for repairs or damage.
As with most lease agreements, once the lease period comes to an end, the employee can either return the car or purchase it for a pre-agreed amount.
For Employers, a Car salary sacrifice can be an attractive employee benefit that can help attract and retain key members of staff. Once again, the scheme will also reduce the employer’s NI contributions.
In addition, because the leasing company takes responsibility for administering the lease including insurance, maintenance and repairs it means that the employer has reduced administration costs and less time-consuming responsibility.
Finally, the scheme can help companies to reduce their carbon footprint, by encouraging the purchase of more fuel-efficient cars.
When is it not possible to use salary sacrifice?
Minimum wage: Employers need to make sure deductions do not take employees below National Minimum Wage, also, there could be an impact on certain benefits for some employees like statutory sick pay or redundancy, so this must be considered prior to proceeding.
Statutory pay: Salary sacrifice cannot be used to reduce an employee’s entitlement to statutory pay. This includes sick pay, statutory maternity pay, or paternity pay.
Pension auto enrolment: Employers cannot use Salary Sacrifice to reduce the level of pension contributions below the government’s minimum requirement, for eligible employees, under pension auto enrolment rules.
Redundancy pay: Salary sacrifice cannot be used to reduce an employee’s redundancy pay entitlement.
Tax and National Insurance limits: Salary sacrifice cannot be used to reduce an employee’s pay below certain tax thresholds. This includes minimum amounts for income tax and National Insurance contributions.
What are the drawbacks of using a Salary Sacrifice Scheme?
Salary sacrifice can be a fantastic way to increase employee earnings by saving on tax. However, it can have an impact on some other benefits linked to an employee’s salary. Here are a few things to consider before deciding to use a salary sacrifice scheme:
Reduction in other benefits: Salary sacrifice may affect an employee’s entitlement to other benefits like overtime pay, bonuses, or redundancy pay which are calculated around their salary.
Entitlement to other tax credits or benefits, such as Working Tax Credit and Child Benefit could also be affected as these will be calculated on your reduced salary.
Applying for credit: Salary sacrifice could be detrimental for employees applying for a loan or mortgage. This is because their gross salary will be lower than their actual taxed earnings. However, some lenders may base their calculations on the pre-sacrifice salary. (It may help to obtain a letter from your employer explaining the salary sacrifice agreement that is in place).
Change of circumstances: Salary sacrifice agreements can be inflexible as they are generally fixed for a set period of time and it may be detrimental should an employee’s circumstances change for any reason.
Life cover: Many employers provide employees with life cover, generally worked out as a multiple of your salary. Your employer may reduce this if a percentage of your salary is sacrificed.
So, is salary sacrifice a good idea?
Salary sacrifice can be a smart move. However, whether or not it will work for you is something you need to consider. It is important to weigh up the pros and cons and do your homework, so that you can make an informed decision.
It is always advisable to discuss your options with your employer too, to make sure whether your decision will have any impact on bonuses, pay increases or other benefits. Finally, an employee’s contract must be amended whenever there is a change, including any new salary sacrifice arrangements.
Interested in Salary Sacrifice? Talk to the experts at JLP Payroll Services. You can contact us here.