Salary Sacrifice – What You Need To Know

At McDade Roberts we have a dedicated payroll department that takes away our payroll clients headaches so that they can get on with other areas of their business. On such headache we remove is understanding salary sacrifice. Read on for a quick overview.

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 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 will be 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, if that is what the rules say. In some cases 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.

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 for cars, accommodation and school fees will be protected until April 2021.

Where a salary sacrifice is claimed, there must be a proper contractual change evidencing 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)
  • The revised contractual arrangement must be that the employee is entitled to lower cash remuneration and a benefit

In other words, it is not sufficient if the arrangement allows employees to remain entitled to the higher level of cash remuneration and they have merely asked the employer to apply part of that cash remuneration on their behalf.

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.

Got A Salary Sacrifice Question?

With our approachable team of accountants and payroll specialists, why don't you give us a call to get any questions off your to do list that relate to salary sacrifice. The first consultation is free so you have nothing to lose. Contact us today and one of our friendly team will be more than happy to arrange a chat.