Why would you want to sacrifice some of your salary?

In the current economic climate, the mere mention of a reduction in salary would give cause for concern. But should this be a concern when the sacrifice refers to a salary sacrifice scheme offered by their employers?

A salary sacrifice occurs if an employee agrees with their employer to give up part of their salary in return for a non-cash benefit. The benefit to the employee is a possible reduction in tax and National Insurance.

In the past this has often been linked to pension scheme, where an employee agrees to a ‘salary’ reduction in return for increased employer contributions to their pension fund.

Today all sorts of benefits are linked to salary sacrifice including, private healthcare, extra holidays and childcare funding.

There are conditions to the sacrifice arrangement that the employer needs to consider, failure to do so may lead to compliance issues with HMRC. The onus is on the employer to ensure their scheme is compliant with the HRMC guidance notes.

HMRC Guidance Notes:

Employment Contract

The employee’s contract can be amended to reflect the sacrifice agreement or defined in a separate document that is then attached to the contract.

Another method is to inform all employees that they will ‘opt in’ to a scheme unless they physically ‘opt out’ by a deadline. The employee needs to continue working after the ‘opt out’ date and have continued to work after the first pay-day following the changes.

National Minimum Wage

If the employee’s salary, on entering the sacrifice agreement, falls below the NMW, the employer cannot enter the employee into the sacrifice agreement.

Statutory Payments

SSP, SMP, OSPP, ASPP or SAP are payable if the employees average weekly earnings are equal to or above the Lower Earning Level (currently £107 per week). Employee’s agreeing a sacrifice arrangement with their employer need to be mindful of this as the sacrifice could reduce their salary to a point where it affects the value or even prohibits entitlement to statutory payments.

Agreement Period

The benefit should be in place for a minimum of 12 months. Reverting back to a non-sacrifice agreement before 12 months elapses is only acceptable if the employee’s financial circumstances change unexpectedly (examples include marriage, birth of a child, divorce and redundancy).

Special Benefits

Certain benefits can be varied each pay period without breeching the sacrifice agreement; these are car parking within the workplace, bicycle and associated safety equipment, childcare vouchers, workplace nurseries or childcare provision contracted by the employer.

Pay Advice Statement

The employer must show the sacrifice on the employees pay statement. You should show either the reduced salary after sacrifice or the pre sacrifice salary and a negative sacrifice amount. If you choose to hold both, the sacrificed value is shown as a negative and appears within the payments section on the payslip and not the deductions section.

For many employees a salary sacrifice arrangement could be financially worthwhile. There are tax and NIC savings to be made by both the employee and the employer. Given the introduction of auto-enrolment, there seems to be a trend where employers’ look to offer a salary sacrifice scheme as a means of offsetting costs associated with the setting up and administration of auto-enrolment.

Employers need to be aware of the guidance notes issued by HMRC and make sure their scheme complies. Payroll software can help automate the sacrifice scheme process, enabling you to operate schemes within the Payroll and produce pay statements that conform to the HMRC requirements.