Benefits in kind have been seen for years by some employers as a useful tool to reward staff. Salary sacrifice arrangements (an agreement between employer and employee to change the terms of the contract and for the employee to agree to give up part of their salary in exchange for non-cash benefits) are popular with both employers and individual employees for their tax and National Insurance savings.
Driven partly by the increase in flexible benefit schemes, the number of requests to HRMC to approve salary sacrifice arrangements has increased by one third between the 2009/10 and 2014/15 tax years.
HMRC has noticed this rise in popularity and following consultation last year have taken steps to close what it sees as a loophole. So what should employers who are or are considering operating a salary sacrifice scheme consider?
Change in terms of employment
An effective salary sacrifice arrangement varies the contract of employment.
The National Minimum Wage Regulations 2015 say that remuneration is payment paid by the employer to the worker. Employer pension contributions do not count towards this figure, since pension contributions are not made directly to the worker.
Vouchers capable of being exchanged for money, goods or services do not form part of a worker’s remuneration and therefore employers should not agree salary sacrifices that would take the individual’s weekly gross salary after the salary sacrifice deductions below the relevant national minimum wage.
Once agreed the new, post-sacrifice salary is generally the correct figure to use when calculating notice pay or redundancy pay, death in service or pension contributions.
The only exception to this is where the employer has agreed a ‘shadow salary’ (the pre-sacrifice figure) to be used for certain deductions.
A contractually agreed shadow salary will not apply when calculating statutory payments such as SSP or statutory maternity, shared parental or adoption pay if the reduction would take the employee below relevant thresholds for these calculations, it may not be in the best interests of the employee to go ahead: for example, if a woman’s average weekly pay falls below £113 per week, she may not be entitled to statutory maternity pay. On the other hand, those who receive tax credits may be entitled to more.
Benefits during periods of unpaid leave
What happens if an employee agrees a salary sacrifice scheme and then goes off sick, or takes maternity leave?
Some employers may continue to pay enhanced benefits during a period of unpaid leave, and others may suspend contributions or benefits.
It becomes more complicated where the employee is on maternity leave. In Peninsula Business Services Ltd v Donaldson, the EAT held that an employer could discontinue childcare vouchers under a salary sacrifice scheme when the employee was on maternity leave.
Gender pay reporting obligations
The new Gender Pay Gap Information Reporting Regulations, which came into force last month, require employers of 250 or more to publish information on both ordinary pay and bonuses. What happens if employees are members of salary sacrifice schemes – should employers use figures before or after the sacrifice?
The Regulations themselves do not refer to salary sacrifice at all. However, since “remuneration provided otherwise than in money” is excluded from the definition of ordinary pay, it seems that benefits – including those only received because of salary sacrifice arrangements – should be excluded.
Bonus pay for these purposes includes remuneration in the form of money, vouchers, securities, securities options, or interests in securities. A bonus that has been sacrificed for, say, a greater payment into a pension scheme will therefore fall outside this category.
Although in principle a bonus – or part of one – could be given up for shares or share options (which do fall within the definition, and therefore would be included in any gender bonus pay reporting), in practice this is unlikely because there will no longer be any tax or National Insurance benefits for doing so (see below).
Salary sacrifice now limited to certain benefits
Before the rules changed, HMRC saw a range of benefits offered by salary sacrifice schemes including white goods, concierge services and double glazing.
Where an agreement is entered into on or after 6 April 2017, the Finance Act 2017 restricts the benefits that attract tax and NIC advantages as a part of a salary sacrifice arrangement to:
Employer contributions to registered pension schemes
Ultra-low transition cars
But what if your employees are still paying off by salary sacrifice the fridge they received last year? All is not lost. Where the agreement was entered into on or before 6 April this year – even if the arrangements start after 6 April – the restriction applies from 6 April 2018, giving both employers and employees time to consider their next steps.
Salary sacrifice arrangements to pay for cars, accommodation and school fees are grandfathered for even longer, and will be protected until April 2021.
What should employers do now?
Employers offering salary sacrifice arrangements should review the benefits offered and see whether any of the existing schemes are affected. If so:
What is the long stop date for each – April 2018, or April 2021?
What will the cost to employees be if the arrangements continue?
What are the contractual arrangements with providers – how quickly can these be terminated?
Will it be necessary to consult with employees over the changes or removal of the schemes?