Salary Sacrifice – What You Need To Know

At McDade Roberts Accountants, we often get asked about the pros and cons of salary sacrifice so we thought we would give you some top line info below.

What Is Salary Sacrifice?

When an employee gives up the right to receive part of the cash pay due under his or her employment contract, this is called a ‘salary sacrifice’ (sometimes known as ‘salary exchange’).

Why would someone give up part of their salary?

Usually it would be in return for the employer undertaking to provide some form of non-cash benefit – perhaps on-site childcare, or help with childcare costs, or a better company car.

Salary sacrifice is a matter of employment law, not tax law. However, HM Revenue & Customs are keen to ensure that each element of an employee’s remuneration package is correctly treated in accordance with tax and national insurance contribution (NIC) legislation. Tax and/or NICs will therefore be charged on the replacement benefit. In some cases however, the benefit is exempt from tax and NICs, which can mean that the reduction in net cash pay could be less than the value of the benefit provided.

Tax and NIC Advantages of Salary Sacrifice?

The tax and NIC advantages of salary sacrifice schemes were removed from April 2017, except for arrangements relating to pensions (including advice), childcare, cycle to work schemes and ultra-low emission cars. Arrangements in place before April 2017 were protected until April 2018, and arrangements for cars, accommodation and school fees will be protected until April 2021.

Conditions That Need To Be Met

Where a salary sacrifice is claimed, there must be a proper contractual change showing that employees have given up the right to some of their cash pay in return for the benefit. There are two conditions that have to be met:

  • The potential future remuneration must be given up before it is treated as received for tax or NICs purposes (it cannot be given up retrospectively), and
  • The revised contractual arrangement must be that the employee is entitled to lower cash remuneration and a benefit

Employees Must Consider…

Before entering into a salary sacrifice arrangement, employees need to consider:

  • Their future right to the original (higher) cash salary
  • Possible breach of the National Minimum Wage/National Living Wage
  • Possible reduction of pay below the lower earnings limit which would affect entitlement to contribution-based benefits and statutory sick, maternity, paternity or adoption pay.

Want to have a chat with a qualified accountant in Preston, Longridge, Garstang or Bamber Bridge about Salary Sacrifice? Just give us a call and we will be happy to arrange a meeting.