To start a Salary Sacrifice scheme, there is an amendment required to the employee’s contract of employment to incorporate the reduced salary being taken. This amendment is usually in return for the employer’s agreement to provide the employee with some form of non-cash benefit, but it is also a popular device to reduce the cost of pension contributions; you avoid paying National Insurance contributions on the part of pay that has been sacrificed.
Implementing a salary sacrifice scheme can be difficult and complicated due to the stringent regulations set by the HMRC. These regulations have been set and are monitored so vigilantly because of the popularity of Salary Sacrifice.
One of the conditions is that a Salary Sacrifice arrangement cannot reduce an employee’s cash earnings below the National Minimum Wage. Salary Sacrifice is therefore not suitable for all employees and employers should bear this in mind when deciding whom to include and exclude from a scheme.
Another issue surrounding Salary Sacrifice is that if the arrangement pushes an employee’s salary below the Lower Earnings Limit for the purpose of paying National Insurance contributions then certain state benefits could be affected. These include basic state pension, statutory sick pay and statutory maternity pay.
Employees can opt in and out of Salary Sacrifice schemes, but their contract of employment has to be amended every time, which is yet another headache for employers trying to navigate Salary Sacrifice.
More information concerning Salary Sacrifice and HMRC’s regulations can be found on HMRC's website.
Salary Sacrifice can benefit both employees and employers by reducing the amount of Tax and National Insurance payable but because of all the pitfalls surrounding setting up and implementing a scheme, many outsourced payroll providers and in-house payroll functions struggle.
The best way to make sure your payroll function can cope with Salary Sacrifice is to familiarise yourself with all of the implications, regulations and conditions of the Salary Sacrifice scheme and make sure your scheme is effective.
Salary Sacrifice is working effectively when the employee has given up the right to part of their salary before it is treated as received through the payroll for Tax or National Insurance purposes, and the revised contract states that the employee is entitled to a lower salary and a benefit.
If you are struggling with operating a salary sacrifice scheme through your own payroll or an outsourced payroll please get in touch