Salary Sacrifice Arrangements

Introduction

 

Salary Sacrifice is an agreement which saves the employee income tax and/or employee/employer National Insurance Contributions (NI). It is an agreement between an employee and their employer. The employee agrees to exchange part of their gross salary in return for a non-cash benefit, like a pension contribution. Decreasing salary means a saving in income tax and employee and employer NI. As a result of the savings, when compared with the employee making personal pension contributions, salary sacrifice can produce the same pension contribution at a lower net cost, or a higher pension contribution at the same net cost.

 

What is Salary Sacrifice?

 

A salary sacrifice happens when an employee gives up their right to part of their salary, in return for a non-cash benefit which is normally exempt from tax and NI. It’s often an employer pension contribution. There are HMRC restrictions on sacrificing for non-pension benefits. Salary sacrifice is a legally binding variation of the employment contract where the employee gives up their right to future cash remuneration.

 

If an employee wants to opt in or out of a salary sacrifice arrangement, employers must alter their contract with each change. The employee’s contract must be clear on what their cash and non-cash entitlements are at any given time. The outcome of the arrangements is the employee has a reduced income tax and NI liability and the employer has a reduced NI liability. A key point is the employer’s NI savings. These could be retained by the employer, reducing their costs or passed fully to the member amplifying the benefits, or shared between them.

 

Practical example

 

An employee chooses to give up £1,000 of their £30,000 salary in exchange for the employer paying the same £1,000 in their pension.

 

The employee will now be taxed and will pay NI on £29,000. The employer will save NI on the £1,000 ( a saving of £138).

 

What are the drawbacks?

 

There are implications and these include:-

 

  • no guarantee that the higher salary entitlement will be returned in future
  • a potential reduction in earnings-related state benefits
  • impact on tax credits
  • there will potentially be an impact on what the employee can then borrow in terms of a mortgage or loan if the lender uses the post sacrifice salary for income multiples.

 

Salary sacrifice may not be allowed if the post sacrifice salary is lower than the National Minimum Wage. However those exempt from the requirement of NMW, such as directors could sacrifice below this amount.

 

Latest HMRC and Government view on salary sacrifice

 

In the Finance Act 2017 a rule was introduced to value all Benefits in Kind at the higher of the cash forgone or the current taxable value and remove a number of exemptions. However, it is important to note that the following exemptions will not be affected by this change:

 

  • employer provided pension saving
  • employer provided pensions advice
  • childcare vouchers
  • workplace nurseries
  • directly contracted childcare
  • cycle to work schemes
  • Ultra-Low Emission Vehicles emitting 75g CO2/km or less

 

HMRC gets involved in proposed transactions in very limited circumstances. They do not pre authorise or approve salary sacrifice arrangements. As salary sacrifice is related to employment law and not tax law it would be inappropriate for HMRC to get involved in the contractual relations between an employer and their employee.

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