A salary sacrifice scheme offers employees certain benefits in exchange for a lower base rate salary. The employee’s contract is amended to reflect their lower wage and in return, they are offered a non-cash benefit such as childcare vouchers or increased pension contributions. As employees do not pay tax on their childcare vouchers, opting to take this kind of benefit can save them money.
Employees are normally asked how much of their salary they wish to sacrifice in favour of childcare vouchers or other benefits. If this changes at any point, a new salary sacrifice agreement must be put in place. The company’s payroll or outsourced payroll company must be informed if a salary sacrifice agreement put in place or if any amendments have been made.
How does it affect other employee benefits or rights?
A salary sacrifice scheme may affect other employee rights and benefits, for example, pension contributions, maternity or paternity benefits, and tax credits.
Pensions
State pension benefits should not be affected provided that the employee continues to pay their National Insurance contributions. If you pay into a company pension scheme, employers may take steps to ensure that the employee’s pension contributions are not affected. If not, the worker’s pension contributions may decrease and their final pension entitlement could be affected.
Maternity and paternity benefits
Statutory Maternity Pay (SMP) and Standard Paternity Pay (SPP) is based on the staff member’s average earnings over a set period before the maternity or paternity leave begins, so if the salary sacrifice scheme is in place during this period the worker may receive reduced payments.
If the employer pays a higher rate than SMP or SMP, payments will be subject to the rules of the company’s maternity or paternity pay policy, so employers will need to advise employees on any impact salary sacrifice might have on their maternity or paternity pay. Employees can continue to receive their childcare vouchers while on maternity or paternity leave providing they are earning enough during this period to participate in a salary sacrifice agreement.
Tax credits
The use of childcare vouchers can affect tax credit entitlements. However, if the employee’s childcare costs exceed £175 a week (£300 if more than one child is receiving childcare), the vouchers can be used to pay for additional childcare costs without affecting tax credits.
How do employers benefit?
The benefit for employers is the saving made in National Insurance Contributions (NICs). The employer pays NICs based on the employee’s salary, so the lower the salary the lower the contributions will be. If the scheme is rolled out across the workforce this could lead to significant savings for the employer.
Putting a salary sacrifice scheme in place
The rules surrounding salary sacrifice schemes are complex and subject to change, so it’s vital that your payroll team or external payroll bureau is qualified to oversee your scheme. If you are thinking about implementing a salary sacrifice scheme or are having problems running an existing scheme, talk to our experts at Cintra Payroll.
We have plenty of experience when to comes to salary sacrifice and will ensure that your schemes run smoothly and that everyone involved receives the benefits they are entitled to.