With the upheaval caused by COVID-19, employers may find themselves being asked to change the terms of a salary sacrifice arrangement. Here’s what you need to know.
Salary sacrifice arrangements: the basics
Salary sacrifice arrangements are agreements that reduce the amount of cash remuneration your employee receives in return for a non-cash benefit. In recent years, the number of benefits that can be provided free of tax and National Insurance under salary sacrifice schemes has steadily declined. The prime benefit is now broadly restricted to:
- employer pension contributions to approved schemes
- pensions advice
- cycle to work schemes
- qualifying low emission cars
- certain specific childcare provision.
Please get in touch with us for further details on any of the above.
In regard to these particular areas, a reduction in gross pay through salary sacrifice can mean that employees will pay less income tax and National Insurance Contributions (NICs). In turn, there should also be a saving in employer NICs.
You can, of course, offer your employees benefits other than these. However, the advantage is likely to come via group discounts for things like gym facilities, rather than realising any tax or NICs savings.
When setting up any salary sacrifice arrangement, make sure you remain minimum wage compliant. Check that the arrangement does not take cash earnings below the relevant minimum wage rate.
Changing the small print
Salary sacrifice is based on the premise that the employee has permanently given up the right to part of their salary. Arrangements generally apply for a minimum period, often 12 months. The terms of the sacrifice, along with details of the non-cash benefit received in exchange, should be formally set out in their contract of employment.
The requirement that it is a permanent agreement can become a hurdle if the employee later asks to alter the arrangement. As you might expect, swapping between the cash earnings and a non-cash benefit at will puts any anticipated tax and National Insurance advantages at risk.
However, HMRC does acknowledge that, in some circumstances, it is possible to vary or discontinue a salary sacrifice arrangement without adverse effect.
This exception is for what are termed ‘lifestyle’ events. Those being:
- a partner becoming redundant or pregnant.
HMRC has now also expanded the list to include:
- changes to circumstances directly arising as a result of COVID-19.
If you are considering varying a salary sacrifice arrangement for an employee, please note the importance of the employment contract. To change the terms of the salary sacrifice agreement, the employment contract must change first and clearly set out the entitlement to cash salary and non-cash benefit at any given time.
How we can help
The guidance from HMRC places emphasis on the fact that the employment contract must be altered BEFORE any changes are implemented. The right to salary must also be given up BEFORE the employee is entitled to receive the remuneration. So it’s essential to get the paperwork and processes right first time. Speak to your RfM advisor for advice on salary sacrifice arrangements or other aspects of tax-efficient remuneration. Enquire online or contact one of our offices.