In the current economic climate pay rises are not the norm, and are not easy to afford. So if some method of rewarding staff can be found that costs very little, that would be worth finding!
Which is where Salary Sacrifice comes in. It is a method of providing benefits to the staff at very low cost. The member of staff benefits from lower tax and National insurance, and even the employer pays lower National Insurance.
So, there has to be a catch, surely. Well, yes. It is only available for a limited range of things, and there are some man-traps to avoid!
Theoretically a Salary Sacrifice can be used for anything where an employee agrees to give up the right to receive some of their pay in return for some non-cash benefit. And that’s the problem – the benefit has to be non-cash so it isn’t liable for tax and NI. So it is no good arranging to reduce somebody’s salary and agree to pay their rent for example – the benefit is then equivalent to cash and is subject to tax and NI.
Salary Sacrifice schemes can be used for a few Government approved things that would otherwise be subject to tax and NI – the most common being Childcare Vouchers and Cyclescheme.
The way it works is that the employee gives up part of their salary (up to £243 per month for a basic-rate taxpayer for Childcare Vouchers) and, because they have given up this pay, they no longer pay tax and NI on that amount. The employer agrees to provide Childcare Vouchers to the same value, and away you go!
The employer may incur some costs in supplying the childcare vouchers, but as they are paying less employer’s NI they are in pocket too.
As the meerkat would say – simples!
But as I said, there may be mantraps!
The employee needs to consider that their pay is now lower. If they then enter another period of SMP their qualifying pay will be less than it was, and they may well get less SMP for the first six weeks as a result. Also any state benefits which depend on level of pay will be affected. There is a huge list including state pension, tax credits, jobseekers allowance , incapacity benefit, maternity allowance etc etc – and an employee contemplating a Salary Sacrifice will need to understand the implications. HMRC Leaflet IR115 gives some guidance.
And there are mantraps for the employer too. Number one to consider is that if somebody voluntarily gives up some pay but does not change their hours, have they dipped below National Minimum Wage as a result? Because they mustn’t!
And the biggy – what happens during SMP?? Well, the legal position is that the employee has given up the right to some contractual pay and the employer has contracted to provide the benefit. And of course whilst on SMP an employee’s terms and conditions mustn’t be messed with. So the employer has to continue paying for the Childcare Vouchers throughout maternity leave. However if the employee is receiving SMP only then they are not receiving any contractual pay and therefore can’t give up any pay. So the employer picks up the bill.
So there you have it. It can be a useful way of paying a benefit – but make sure you understand and are prepared for all the mantraps.
This week’s payroll advice is brought to you by Clear Books guest blogger – John Clegg. Check out what HMRC have to say about Salary Sacrifice.
