Salary Sacrifice – Benefit or Burden?
Salary sacrifice arrangements have long been held as one of the few ways in which employers and employees retain a tax advantage around the provision of certain types of employee benefits.
Since its inception, there has been a large body of employers who have been firm advocates of its advantages. When attempts were made to expand salary sacrifice to cover everything from car parking spaces to smart watches, HM Revenue and Customs clarified in 2016 that going forward it would only allow salary sacrifice arrangements to be used for pensions, childcare and green transport schemes such as cycle to work. This coincided with the growth and expansion of the UK’s automatic enrolment pensions system which saw all UK employers having to make pension contributions in respect of their eligible workers.
However, is 2020 the year when advisors and employers might consider reversing the perceived wisdom of the last 30 years as a result of the pressures of the COVID-19 crisis, the UK recession and government responses? Is it still worthwhile for employers and employees to have a salary sacrifice scheme arrangement in place?
The unanimous answer ought to be yes, both employer and employee gain national insurance savings; from an employer perspective this can increase employee benefits at no extra cost or represent a cost-saving from an employer, and from an employee perspective this can mean greater take home pay. While there are always areas of concern, such as whether a reduction in salary might affect entitlement to group life assurance or permanent health insurance, mortgage borrowing and entitlement to state benefits, this can all be offset by ensuring the salary sacrifice arrangement is put in place correctly and, in particular, notional salary remains. Careful planning for salary sacrifice means no employee should fall below national minimum wage levels and indeed, in many cases, a tailored approach to the use of salary sacrifice can see employees potentially regain part or all of their entitlement to child benefits. And for high rate tax payers, it is potentially a chance to regain part or all of their personal allowance, depending on the size of salary and the amount they choose to sacrifice.
The onset of the medical and economic crisis of 2020 as a result of COVID-19 have seen both employers and employees exposed to costs and/or losses they may not have been expecting.
Although the furlough scheme, which ends on 31 October 2020, provided much needed support for employers in terms of costs around their employees’ salaries, one of the things it didn’t assist with was where employers were using salary sacrifice in relation to pensions (this covered both initial furlough up until the end of August and since then, when pensions and national insurance contributions fell back to employers). The issue was that under the salary sacrifice arrangement, the employee’s salary was reduced to take account of the sacrifice and the employer therefore had to cover the pensions cost. The Job Support Scheme (JSS) excludes all pensions and national insurance costs. For those employers trying to do the right thing, the amount of savings they could make either from furlough or from JSS had been significantly reduced. While HMRC recognised the COVID-19 crisis was a lifestyle event and therefore would allow individuals to exit salary sacrifice arrangements should they wish to do so, there was no compulsion to do that.
In this type of climate where national/local lockdowns and/or support packages will become the norm (at least until a vaccine is found), is it still worthwhile for employers to have salary sacrifice arrangements in place, or would they be better off (notwithstanding the additional national insurance costs for both employers and employees) abandoning them until there is more certainty?
Salary sacrifice is introduced as a variation of contract of employment and can reduce an employee’s salary and reduce entitlement to a range of benefits relating to earnings. Most of the time, these are not of particular relevance, but in a time of crisis they can become very important. It is at this moment that both employers and employees may realise that the way they set up their salary sacrifice arrangement has unintended consequences. Unless the introduction of the salary sacrifice arrangement contained an explicit obligation for the employer to measure certain benefits against the pre-sacrificed or notional salary, the employer is entitled to measure everything against the post-sacrificed salary amount. This could have an impact in calculating the amount of redundancy pay, notice pay, holiday pay, contractual sick pay, life cover, contractual maternity and paternity pay along with overtime and bonuses.
In the current climate, having a clear understanding of what the contractual entitlement is, whether you are an employer, finance director, HR manager or employee, is of paramount importance in planning how your business will respond during the next 12 months, underpinning this would be ensuring you are clear about whether or not you want to put in place a salary sacrifice arrangement, retain the one you have or, whether or not the one you have already achieves your objectives. If it doesn’t, you may need to change this while you have time.
The days when putting in place a salary sacrifice arrangement was a no brainer are not quite gone, but it is not going to be quite as obvious that this is the best way forward for many employers, given the current uncertain economic situation. In these circumstances, it is even more important for employers to get the right support and assistance in implementing any kind of change.
We are hosting a joint webinar on this topic with Punter Southall Aspire, on Thursday 15th October 2020. If you are interesting in finding out more about salary sacrifice, click here to register.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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