Understanding salary sacrifice schemes

Both employers and employees have enjoyed the perks offered by salary sacrifice schemes for many years.

But the recent government clampdown means employers need to tread carefully to ensure they understand the new rules and are not caught out.

What is a salary sacrifice scheme?

A salary sacrifice scheme is where an employee decides to give up part of their cash pay in exchange for a non-cash benefit, for example, the cycle to work scheme, childcare vouchers or increased pension contributions.

What is the appeal of salary sacrifice schemes?

They have been popular because of the tax advantages the offer. For employees, the benefit may be exempt from tax and/or not be counted when calculating National Insurance Contributions (NICs). For employers, they are required to pay NICs on the employee’s salaries, but not on the benefit. When done on a large scale, this can produce a significant saving for the employer.

Employers may not be able to give their staff frequent pay rises, but these types of schemes are a great tool to attract new employees and retain and motivate key talent.

Do they require a change to the employee’s Contract of Employment?

If an employee decides that they want to opt in for a salary sacrifice scheme, this will require a change to the employee’s Contract of Employment. You can amend the relevant provision or write a letter or addendum setting out the change and attach that to the contract.

In cases where the employer wishes for an employee to join a scheme, they will need the employee’s consent. Doing it without their consent will lead to risks of breach of contract. However, if the employee has been notified of the change, is provided with a deadline to opt out, carries on working after this deadline and raises no complaints once the change has been implemented, the employee has effectively agreed to the change through their conduct.

What has changed?

Only salary sacrifice schemes in relation to childcare vouchers, cycle to work schemes, ultra-low emission cars and pensions will continue to not be subject to income tax or be considered when calculating NICs. All the other schemes will ultimately lose these advantages. If the salary sacrifice arrangement already existed prior to April 2017, they will be protected until April 2018. For those schemes regarding cars, accommodation and school fees, this will be protected for four years until April 2021.

What does this mean for the future of salary sacrifice schemes?

You will need to make a decision. You can continue with any salary sacrifice schemes already in place or implement a new one post April 2018 but of course you need to remember your NIC obligations.

Alternatively, you may decide to scrap them. If you do, you can always offer other types of benefits that will appeal to your employees and prospective job candidates. Read some of our suggestions.

Need some help?

To discuss this further and talk through what benefits you could offer employees in your organisation, contact your Employment Law Adviser who can give you guidance.

Director of Legal Services

James Tamm

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