Potential tax and national insurance savings make salary sacrifice seem an attractive option, but employers should beware of possible pitfalls, says Amanda Wilkinson
Implementing a salary sacrifice arrangement around benefits may seem an attractive option for employers keen to optimise any tax efficiencies available, but there are a number of issues that must be considered.
Firstly, any salary sacrifice arrangement must be valid as far as HM Revenue & Customs (HMRC) is concerned, or the employer could end up being liable for national insurance contributions (NICs) it had not anticipated. Shawn Healy, employment tax director at BDO Stoy Hayward, says: “Employers need to make sure salary is given up [in exchange for a noncash benefit] before there is any entitlement to it, and that the sacrifice is a permanent thing. Typically, that means for 12 months or longer.”
Any contractual changes must be put in writing, signed and dated. But such changes could affect other perks and remuneration, such as life assurance, bonuses, overtime pay, and pension contributions and benefits. James Hewitt, senior consultant and implementation manager at Motivano, says: “It is important for the organisation to make sure it rewrites its existing policies, so it creates a new salary element, called reference salary, which is the salary before any effect of salary sacrifice.”
Giving up salary in exchange for a non-cash benefit generally means an employee saves NI on the value of the benefit-in-kind, but must pay tax on it through a P11D, while the employer continues to pay NI. However, other tax efficiencies can be gained on benefits such as childcare vouchers, bikes for work and pensions, subject to the relevant tax rules.
But some schemes that are being held up as providing additional tax efficiencies, such as salary sacrifice around staff canteens, should be treated with more caution because they have not received explicit government backing.
HMRC has come down hard on some employers for operating salary sacrifice schemes around staff canteens, because it said these equated to cash for cash, and claimed the tax and NI back. But other employers have had their schemes approved locally, leaving the overall position on canteens unclear.
Hewitt thinks salary sacrifice schemes around the provision of bus transport to and from work are likely to be approved because they fit with the government’s green agenda. Employers should also be aware of other legislation that could affect perks under salary sacrifice. Inez Anderson, tax director in the employment tax and incentive group at Smith and Williamson, says: “There is a real need with lower-paid staff to ensure the sacrifice does not take salaries below the national minimum wage level.”
Employers must also examine the position of staff going on maternity leave who have entered into a salary sacrifice arrangement.
Amendments to the Sex Discrimination Act, which came into effect last October, mean employers must make non-cash contractual benefits available to employees throughout their statutory maternity leave. Guidance from HMRC says this entitlement will continue even though an employee may not be in receipt of any salary that can be sacrificed and adds that statutory maternity pay cannot be sacrificed.
Nick Squire, a partner in the employment team at Freshfields Bruckhaus Deringer, says: “The issue arises when an employee goes on maternity leave and her salary may drop to a level below the level of sacrifice. Can the employer then recover the sacrificed amount? The answer is, I think, probably no.”
There is still much debate over what constitutes non-cash benefits if paid for through a salary sacrifice scheme, although HMRC has said childcare vouchers do count. Employers must also take into account the Consumer Credit Act if they provide bikes for work. Those that provide bikes worth up to £1,000 are covered by a special group consumer credit licence, but if the bike’s value is above £1,000, the employer must obtain a separate licence. But staff aged below 18 years cannot enter into a credit arrangement. This was an issue for McDonald’s, which instead offers staff a discount on the cost of a bike.
Employees’ entitlement to working tax and child tax credits and state benefits, including pension and statutory sick pay, are other key issues to consider. Rather than giving specific advice, employers should warn staff they could lose out if they fund a perk via salary sacrifice, and refer them to the relevant authorities.
Finally, employers must keep abreast of any changes to NI and tax bands and rules, which could impact on a scheme
At a glance:
What to watch out for with salary sacrifice
- That the salary sacrifice is valid.
- National minimum wage legislation.
- The impact on other perks and forms of remuneration based on salary.
- Legislation on statutory maternity leave and statutory maternity pay.
- Employees’ entitlement to tax credits and state benefits.