Salary sacrifice offers employees the opportunity to exchange a portion of their contractual salary usually in return for non-cash benefits, these schemes provide advantages for both the employer and the employee.
All salary sacrifice schemes must be stated in writing in their employees’ contracts and employers must be mindful not to reduce employees’ cash earnings below the National Minimum Wage (NMW).
Since 6 April 2017, HMRC has restricted the benefits available through salary sacrifice with the introduction of the Optional Remuneration Arrangement (OpRA) rules, which means that non-qualifying arrangements are now taxed on the higher of the cash amount that the employee would have received, or the taxable benefit in kind of the non-cash benefit.
Some salary sacrifice schemes remain outside of the OpRA rules which still provide a meaningful incentive, such as:
- The provision of bicycles and cycling safety equipment
- Pension scheme contributions
- Employer-provided pension advice
- Workplace nurseries
- Employer-provided childcare schemes (joined pre-4/10/2018)
- Cars with CO2 emissions of 75 grams or less (whilst not an excluded exemption, the earnings charge basis under the normal benefit in kind rules applies when calculating any benefit in kind and not the cash amount even if higher)
Here, we will delve into the benefits of salary sacrifice schemes and how they can have a positive impact:
1. Tax Savings
One of the main advantages of participating in a salary sacrifice scheme is the potential for income tax and national insurance savings for the employee and national insurance savings for the employer.
2. Enhanced Remuneration Package
By maximising the non-cash benefits provided through the scheme, employees can effectively enhance their overall remuneration package.
3. Employee Well-being
Salary sacrifice schemes offer a range of non-cash benefits that contribute to improved employee well-being. For example, employees can utilise these schemes to obtain additional pension contributions, allowing them to bolster their retirement savings. By making these benefits more accessible and affordable, employers can demonstrate their commitment to supporting employee well-being and a healthy work-life balance.
4. Employer Attractiveness and Retention
Implementing a salary sacrifice scheme can significantly enhance an employer's attractiveness to potential employees. In today's competitive job market, offering a robust benefits package can be a big differentiator. Prospective employees are more likely to be enticed by employers that go above and beyond the standard salary and offer additional non-cash benefits. By actively investing in their employees' well-being and personal development, companies can improve employee loyalty and employee retention rates.
5. Cost-Effective for Employers
While salary sacrifice schemes can have significant advantages for employees, they are also cost-effective for employers. By providing non-cash benefits instead of traditional salary increases, companies can save on national insurance and pension contributions. These cost savings can then be reinvested back into the business.
In summary, salary sacrifice schemes offer a range of benefits for both employees and employers. From tax savings and increased take-home pay to enhanced employee well-being and improved employer attractiveness, these schemes have the potential to positively impact the workplace.
By implementing such programs, employers can strengthen their talent acquisition and retention strategies, improve employee satisfaction, and demonstrate their commitment to the well-being of their workforce. As employees seek more than just a pay rise, salary sacrifice schemes provide an effective solution to match the individual needs of the employee with the employer’s business goals.
Salary sacrifice arrangements can impact the employee’s payments and benefits such as State Pension, Maternity Allowance and Statutory pay. As such, advice should always be sought ahead of implementing a salary sacrifice scheme.
To find out more about Salary Sacrifice, contact a member of our tax advisory team at js.tax@jsllp.co.uk.