Salary Sacrifice is an arrangement whereby an employee agrees to a lower salary, and hence pays less tax and national insurance. Usually the employee will want to do this in return for tax free (or low tax) benefits such as pensions, cycles or childcare vouchers.
Points to note when operating a salary sacrifice agreement for your employees:
- The employees contract should actually change. It should be clear on what cash and non-cash entitlements (benefits) are being received. If you want to change the agreement in the future an new contract should be put in place.
- Salary sacrifice can affect an employee’s entitlement to earnings related benefits such as statutory maternity pay / maternity allowance. This should be considered.
- A salary sacrifice arrangement must not reduce an employee’s cash earnings below the National Minimum Wage rates.
- HMRC state: “Salary sacrifice is a matter of employment law, not tax law. Where an employee agrees to a salary sacrifice in return for a non-cash benefit, they give up their contractual right to future cash remuneration. Employers and employees who are thinking of entering into such arrangements would be well advised to obtain legal advice on whether their proposed arrangements achieve their desired result.”
HMRC helpfully summarise the requirements
- The employee gives up an amount of cash salary equivalent to the contributions they are making to the company’s approved pension scheme.
- The employer agrees to increase employer contributions to the pension scheme by an equivalent amount.
- Employees are notified that the new arrangements will automatically apply from a particular date unless they opt out in advance.
- If they do not opt out at the start, employees cannot opt out again until the first anniversary of the commencement of the scheme, unless they experience a ‘lifestyle change’ (marriage, birth of a child, separation or divorce, death of a partner or child, change from full-time work to part-time).
- Participation in the scheme brings about a change to the terms and conditions of employment of the participants.
- The employee’s previous gross salary (“base salary”) remains the yardstick for other issues (e.g. the calculation of overtime pay, annual salary increases or salary- related benefits).
If you wanted to you could ask HMRC Clearances Team to confirm the tax and NICs implications of a salary sacrifice arrangement once it is in place. However, this is not a requirement.
HMRC would want to see:
- evidence of the variation of terms and conditions (if there is a written contract)
- payslips before and after the variation
This can be emailed to the HMRC Clearances Team at firstname.lastname@example.org.
Or sent in the post to:
HMRC Clearances Team
21 Victoria Avenue
HMRC provide further details: https://www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye
For more information contact us.