Salary sacrifice schemes are often seen as popular benefits, and understandably so, in a time when we all appear to be more aware of our budgets and with shops closing as a result of our decreased spending (visit any NI town centre to experience this!) – the temptation to avail of free dental care for ourselves and possibly our children, the opportunity to drive a new car whilst saving on income tax and national insurance contributions, the chance to exchange an amount of salary for a higher value of childcare vouchers, what’s not to like? It all sounds very appealing but there are implications to consider.
We’re all familiar with the saying ‘if it sounds too good to be true it likely is’: whilst salary sacrifice schemes can be beneficial, financially and in terms of accessing products/services perhaps otherwise unavailable, consideration should be given to the pros and cons, for as is the norm with anything to do with tax there are both!
CONSIDER THE PROS
As an employer, at a glance being able to reward and motivate employees whilst saving money at the same time seems a no-brainer. Indeed there are many positive aspects to salary sacrifice schemes for both employers and employees;
Cost-effective – Often main temptation of opting into schemes is the ‘earn less to benefit more’ ethos. Putting it simply, by opting into a scheme employees give up pay and receive a benefit instead. These benefits are often exempt from tax and National Insurance.
Helpful – Often employees are keen to avail of salary sacrifice benefits as they enable them to access products or services that may otherwise be out of reach or more costly, for example private healthcare, a new car, childcare vouchers, parking, training, new technology or discounted shopping. Some salary sacrifice options also facilitate lifestyle and wellbeing choices such as the opportunity to purchase additional annual leave or avail of a cycle to work scheme.
Reduction in payroll costs - Generally there are savings to be made on employer's NI contributions due to a lower payroll after an amount of employees salary is sacrificed.
Increase in Tax Credit entitlement – By reducing the employee’s relevant pay, for tax credit purposes the value of the benefits is not included in the calculation of income therefore potentially increasing the employee’s working tax credit award.
Employee retention – Salary sacrifice schemes can help with employee retention: in addition to not wanting to lose out on the benefit should they move, and valuing their current employer for providing the scheme, employees may be locked into a scheme for a period of time such as with annual car parking and new car options.
Health, safety & wellbeing compliance – In addition to tax benefits of salary sacrifice arrangements for cars, employers can demonstrate compliance with their duty-of-care requirements, and where applicable CSR policies, for employees required to drive for business through assurance that they are driving a safe and often more environmentally friendly car. Private healthcare and health cash plans can also demonstrate commitment to employee wellbeing and meet requirements in respect of eye test and stress management policies.
CONSIDER THE CONS
Whilst employers would be forgiven for being wary when considering setting up a new salary sacrifice scheme after the much publicised Reed vs HMRC appeal judgement, the case on examination serves more of a good reminder to properly set up and administer any scheme having fully considered the potential implications such as the following;
HMRC compliance – In the Reed hearings there seems to have been much discussion over the fact that Reed Employment believed they had obtained HMRC approval before launching the salary sacrifice scheme. HMRC however took the stance that whilst they had been approached they had not cleared the scheme. Employers should be mindful that HMRC will only give approval post launch after the first transaction has taken place so, with this in mind, employers launching a new scheme may want to start with a pilot before seeking HMRC approval.
Benefit-in-kind (BIK) tax liability – Whilst both employer and employees save on NI contributions through salary sacrifice schemes as a result of the reduction in salary, employees do attract some tax liability where scheme benefits are classed as a benefit-in-kind. This will be more of a consideration for higher rate BIKs such as cars whereby the amount of BIK tax due is calculated according to a number of variables including fuel type and official CO2 figure of the car. No need for anyone affected by the Volkswagen scandal to worry though as HMRC has confirmed that cars involved will not be rebranded for BIK duty!
National Minimum Wage compliance - Employers need to ensure employees do not fall below the appropriate level of NMW. For employers offering salary sacrifice schemes this was an additional consideration when applying the recent National Living Wage rate for workers aged 25 and over. Whilst there can be a temptation to offer a number of schemes to provide a range of benefits to employees, it can create difficulties when employees opt into salary sacrifice arrangements for more than one benefit as a salary sacrifice arrangement cannot reduce an employee’s pay below the NMW with the value of the substituted benefit not taken into account in determining whether an employer’s obligations in relation to the NMW have been met.
Parental leave and long-term sickness - When an employee is on maternity or paternity leave, or is absent due to long-term sickness, employers must continue to provide the benefit, despite a potential drop in salary.
State benefit entitlement – Opting into a salary sacrifice scheme can affect current or future entitlement to a range of benefits as some are based on NICs paid, and others on earnings. For example, entitlement to the State Pension can be affected if reduced earnings fall below the Lower Earnings Limit (LEL): it may also be affected if an employee’s reduced earnings fall between the LEL and the Upper Earnings Limit. Just as tax credit entitlement could be increased, if an employee is already getting tax credits to help with childcare costs, they may be better off not opting for salary sacrifice as they can only claim tax credits for childcare they pay with their own money rather than with vouchers.
Liability when an employee leaves – Whilst salary sacrifice schemes can prove a useful retention tool, where employees are locked into a scheme for a period of time, such as with annual car parking and new car options under salary sacrifice, liability for the products/services under the scheme may remain with the employer if an employee leaves. To guard against this the salary sacrifice agreement should clearly specify what is expected in the event an employee leaves.
Impact of a lower salary – If an employee opts into a salary sacrifice scheme the amount that they can contribute to a pension scheme will be reduced as their earnings will be reduced. Also, any associated employer contributions may be reduced which can adversely affect the employee’s future pension entitlement. Lower earnings may also impact mortgage applications with life cover also being less if it’s based on the reduced salary level.
Change to Terms and Conditions - Where an employee agrees to opt into a salary sacrifice scheme in return for a non-cash benefit, they are effectively giving up their contractual right to future cash salary remuneration making salary sacrifice a matter of employment law, not tax law. Endeavours should be made to ensure employees understand the implications of entering into a scheme, and confirmation of opting in and acceptance of terms should be obtained via a relevant agreement.
Additional administration – Setting up and running a salary sacrifice scheme can mean extra administration, from correspondence with employees and scheme providers to updating employee contracts. Whilst most scheme providers should be able to help with administration it’s important to consider in-house requirements, such as reviews and updates when NMW and tax changes occur.
Although therefore the tax savings available through salary sacrifice schemes are indisputable, there are a number of knock-on effects that need to be considered. Employers can demonstrate good duty of care by informing employees of both the advantages and potential drawbacks associated any schemes offered, and ensuring they fully understand the remuneration options available to them. Ultimately, weighing up the pros and cons before deciding as an employer whether to offer the scheme, and as an employee before deciding whether to opt in, is key.
As the Reed case has highlighted, it is also important to ensure that the scheme/s work for tax purposes and that documentation is robust. At Willis Insurance and Risk Management essential professional advice and guidance on this and all other aspects of HR, Employment Law and Financial Services is available through both our Willis Consulting and Willis Wealth Management divisions.
Give us a call to arrange a free consultation on 028 9032 9042.