The following article outlines the salary sacrifice scheme in which one can sacrifice part of their salary for a material payment. The tax can be reduced or completely exempt on certain benefits.
A salary sacrifice is an agreement between an employer and an employee to change the terms of employment contract to reduce the employee’s entitlement to cash pay. This sacrifice is usually made in return for some form of non-cash benefits.
The salary sacrifice can be financially beneficial for both employer and employee. For example, some non-cash benefits can be wholly or partially exempt from Income Tax and National Insurance Contributions (NICs).
Although a salary sacrifice cannot reduce an employee’s cash earnings below the National Minimum Wages Rate.
What to do
If an employee wants to opt in or out of a salary sacrifice arrangement the employer must first alter their contract with the change. The employee’s contract must be clear on what their cash and non-cash entitlements are at any given time.
The terms of the Salary Sacrifice may be altered where a ‘lifestyle change’ significantly alters an employee’s financial circumstances. For example, if the employee gets married, divorced, or an employee’s spouse or partner becomes redundant or pregnant.
Tax and NICs
Some non-cash benefits qualify for an exemption from tax and or National Insurance Contributions. If this is the case for a benefit and employer provides to an employee as part of a salary sacrifice, any conditions that apply to the exemption must be satisfied.
Your employer’s responsibility is to ensure that they pay and deduct the right amount of tax and NICs for the cash and benefits they provide. For reporting the non-cash benefits to HMRC at the end of the year, the forms P11D or P9D must be submitted along with any other payroll submissions though the PAYE scheme.
Once the salary sacrifice is in place, the employer can ask the HMRC Clearances Team to confirm the Tax and NICs implications.
HMRC Clearances Team
21 Victoria Avenue
Southend on Sea
Alternatively they can email the HMRC Clearances Team at firstname.lastname@example.org
Earning Related Benefits
Salary Sacrifice can affect an employee’s entitlement to earnings related benefits such as Maternity Allowance and Additional State Pension. The amount they receive may be less than the full standard rate or they may lose the entitlement altogether.
Contribution Based Benefits
Salary Sacrifice can affect an employee’s entitlement to contribution based benefits such as Incapacity Benefit and State Pension. Salary Sacrifice may reduce the cash earnings on which NICs are charged. Employees may therefore pay less or no NICs.
Salary Sacrifice can affect the amount of statutory pay an employee receives. It can cause some employees to lose their entitlement altogether. If a salary sacrifice arrangement reduces an employee’s average weekly earnings below the lower earnings limit, then the employer doesn’t have to make any statutory payments to them.