What is salary sacrifice?

This is an agreement that is used to reduce an employee’s entitlement to cash pay (in return for a non-cash benefit such as a good or a service) This can also be known as a “salary exchange”.

Some of the most popular options include tax free benefits such as pensions contributions, workplace nurseries and cycle to work schemes, reduced benefits such as low emission or electric cars, or healthcare benefits such as gym memberships, life insurance and medical insurance.

How does it work?

As an employer, you can easily set up a salary sacrifice agreement by changing the terms in your employee’s working contract, however, the employee must agree to the change and sign to prove this.

As a rule, the agreement should not reduce their earning below the national minimum wage.

Tax and National Insurance contributions:

• Since this set up is deducted from the employee’s salary before tax, if you choose a tax-free benefit such as the cycle to work scheme, the employee will save Income tax (up to 45%) and both Employers and Employees National Insurance on the sacrificed amount.

• The employer savings relate to Employer National Insurance. Typically, this means the employer can generate up to 13.8% savings on certain benefits. The employee saving can then vary between 2% and 12% depending on the level of the employees’ earnings.

• Reporting requirements for non-cash benefits are different to those for cash earnings, and they should be reported to HMRC at the end of the tax year using the end-of-year expenses and benefits online form P11d. You can also apply before the beginning of the tax year to payroll the additional benefits with your monthly or weekly wages, which we recommend when a sacrifice agreement is used.

What are the perks?

• For tax free benefits, significant Income Tax and National Insurance savings can apply on the sacrificed amount.

• For taxable benefits, you can still receive an Employee National Insurance saving of between 2 and 12%.

• It allows employees to make bigger purchases, benefit from group discounts (such as medical insurance) and spread the cost (such as a car or bike).

• The employer does then not need to pay business mileage since the employee is no longer using their personal car for business travel, so no claim for business miles.

• The flexibility attracts staff and increases employee retention.

What are the cons?

• There may be an impact to any credit or mortgage applications, since the salary is being lowered, so check with your broker or lender first.

• Statutory maternity pay and statutory sick pay will be affected, as they will be based on the reduced salary.

• Employee’s will still need to pay tax on the Benefit in Kind, so it’s important to consider payrolling the benefit to spread the impact throughout the tax year. If staff turnover is high, this could cause extra administrative work and problems managing the benefits provided.

• If you provide cars, the business will be left with any payments if an employee leaves their job before the car leasing contract expires, so consider providers where the lease is transferred to the employee such as Octopus EV, or Tusker.

Be Aware of OpRA (Optional Remuneration Arrangements)

One area to consider if you use a salary sacrifice scheme is the impact of the Optional Remuneration Arrangement rules that came into force for certain benefits in April 2018. Perks that are affected include: Car Parking, Private Medical and Dental insurance, Use of Company Assets and Transfer of Company Assets.

It’s important you seek advice on these rules before using them in any flexible benefit or salary sacrifice scheme.

All in all, flexible salary sacrifices schemes can be convenient, help attract or retain staff, and assist with passing on additional Tax and National Insurance savings to your company, or to your staff.

If you want to know more about salary sacrifice schemes, tax savings, or just need some general advice and guidance, please do not hesitate to get in contact with us here.