Salary Sacrifice Guidance from HMRC
Published on 1st September 2008
in:
Payroll Services
Advice from Simon Parsons...
Employer representatives sitting on the Statutory Payments Consultation Group have been pleading with the various government agencies involved in Statutory Payments to make clearer what employers have to do to comply with Maternity Rights, especially in light of the extension of rights to non-cash benefits.
On 20th May 2008 Her Majesty’s Revenue & Customs (HMRC) published a comprehensive guide to “Statutory Maternity Pay – Salary Sacrifice and non-cash benefit on their website (www.hmrc.gov.uk/employers/sml-salary-sacrifice.pdf), a joint effort between HMRC, the Department for Business Enterprise and Regulatory Reform (BERR) and the Department for Works and Pensions (DWP), along with the assistance from the employer and software representatives of the Statutory Payments Consultation Group.
Following a joint survey undertaken by Payroll Alliance and the Institute of Payroll Professionals on the impacts of the new maternity rights extending benefit in kind entitlement to 52 weeks, it was obvious to the employer representatives and the government that a wide and varied application of salary sacrifice interpretations was being undertaken and there was a misunderstanding regarding non-cash benefit provision (whether salary sacrifice or just plain employee benefits).
Although not described specifically in legislation, salary sacrifice is a legally binding change in the contractual arrangements between employee and employer. Generally, the employment contract is amended to reduce the employee’s entitlement to cash pay on the basis that the employee receives an alternate non-cash benefit instead. If no contractual change has actually been made, then the salary sacrifice fails and the benefit in kind is treated as cash pay. Equally, if the employee (or employer) can opt in and out of the arrangement at will, then this fails under a precedent set in the Heaton v Bell case where a benefit could be given up at any time to receive increased pay – as a consequence it was declared that the benefit was a chargeable emolument and therefore subject to PAYE and NICs.
The reduction in cash pay through a successful salary sacrifice results in reduced PAYE and NICs. Then the employee and employer are left with the tax and NICs position on the giving of a free non-cash benefit in kind. Often, the benefit may be free of both tax and NICs, and many others are free of NICs.
Although salary sacrifice may be represented in any way, shape or form on the payslip, it is the contractual arrangement between the employee and employer that positions the tax and NIC implications.
HMRC, DWP and BERR concur that employer contributions are not non-cash benefits in kind.
No, pensions fall under alternate legislation, so employees are entitled to continued pension rights. They must be continued for 26 weeks in all cases (under Maternity and Parental Leave Regulations) and extended for any additional weeks where the employee is in receipt of any maternity pay (Social Security Act 1989). They are employer pension contributions!
As a salary sacrifice arrangement is a legally binding contractual change, the employer is required to continue to contribute 8% as if the employee were in receipt of full pay.
No, this would breach discrimination law. The employer must continue paying 8% (as they would if the employee were not on maternity leave). As the amount cannot now be recovered from the employee, who funds this additional contribution amount? The answer is simple, the employer must fund the contractual employer pension contribution (because that is what it is).
I would suggest no, but the employer that withdraws such benefits is breaching discrimination law and the employee entitled to make a legal claim which could prove extremely expensive for the employer.
The new guidance is essential reading and I would suggest 100% accurate. Does it outline all elements of non-cash benefits? No, but then its not intended to – but it does lay out the employers legal obligations.
Pension contributions - Employers need not continue to make employers’ occupational pension contributions during unpaid Additional Maternity Leave (AML), or to count unpaid AML as reckonable service for the purposes of occupational pension contributions. (However, the law already requires employers to continue to provide occupational pension contributions during any period of paid maternity absence and this requirement is unaffected by the changes described here. The law also requires that employers continue pension contributions during Ordinary Maternity Leave (OML), regardless of whether the employee is in receipt of maternity pay. For more details please see guidance on OCCUPATIONAL PENSION SCHEMES DURING ORDINARY AND ADDITIONAL MATERNITY LEAVE here.
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Comments
Carolyn Parker
7th May 2009
Do you know whether there is a statutory time-limit for non-cash benefits (such as childcare vouchers and retail vouchers) to be delivered to employees who choose these benefits under a salary sacrifice arrangement. e.g. does the ‘benefit’ have to hit the employees a/c on the same day as their cash benefits?
P Simon Parsons
11th May 2009
Provision of benefits in kind are not statutory items but fall under contractual benefit provision. Benefits do not necessarily have to be provided on the same day. For example, pension contributions do not have to be paid over on pay day, but they are required to be paid over as soon as practical and at least by 19th of the month following the calculation point.
Child Care Vouchers are not required to be received by the employee on the same day as pay day. Employers should set out the terms and conditions in the arrangement of receipt of benefits in kind (which strictly speaking have little to do with payroll). Where payroll is involved is with the operation of the salary sacrifice.
The issue of vouchers is generally handled by the voucher providers directly with the employee following receipt of the funds from the employer and within agreed timescales
Helen Wade
29th May 2009
When one of our employees does not have sufficient salary to sacrifice for Child Care Vouchers due to maternity leave and the employer has to provide this, how is it processed through the payslip. Does the employer give the employee sufficient “normal pay” that is taxabale and niable so that she can continue to sacrifice , or does the employer provide a net payment of the value of vouchers and an offsetting equal amount to show the vouchers have been purchased?
P Simon Parsons
29th May 2009
The provision of Child Care Vouchers as a Benefit In Kind has no requirement to be reflected through the payslip or payroll. The employer ensures that the CCVs are purchased and distributed to the employee.
If an employer wishes the provision that is not under salary sacrifice to be reflected in some way, then they could, as an option, use a notional value for display on the payslip. This value would be non-payable, non-taxable, non-NIable etc etc to reflect the purchase of the CCV by the employer.
Daniel Ojile
31st May 2011
Under a salary sacrificed pension, are employers liable for employees pension during the 39 weeks of paid maternity? In other words, should employers bear the cost of employee pension during paid maternity in a salary sacrificed arrangement, since employers cant make salary sacrifice from SMP or statutory pay?
What would be the treatment for Statutory sick pay.
Thank you
P Simon Parsons
1st June 2011
Daniel
If the pension scheme is operating as a salary sacrifice, there is no employee contibution. all contributions are the employers. What occurs is that the employee takes a pay cut and the employers makes contributions. During maternity leave there is no pay to cut so that part stops. But the employer must continue to make the employer contribution for all weeks where the employee is paid (the 39 weeks). Who funds this? The employer does.
Peter Matthews
26th October 2011
Simon,
How does Salary sacrifice pension contributions work in the case of Statutory Sick Pay? Is this the same format as SMP, in that it is already a total employer payment, so employer continues to fund this?
P Simon Parsons
28th October 2011
It depends on the contractual arrangement with the employee for periods of sickness. You cannot sacrifice a statutory payment (so you cannot reduce SSP), but unlike maternity rights, sickness rights are different. So there may be scope for the employer to stop benefit provision during periods of sickness.
Sarah Payne
31st October 2011
Simon
Are there any restrictions on an employee increasing their salary sacrifice contribution prior to commencing maternity leave in order to benefit from employer funded PFC’s during this period?
Many Thanks
Sarah
P Simon Parsons
31st October 2011
Yes, the principle of Heaton v Belle potentially applies. Salary Sacrifice arrangement cannot just be changed at will, else HMRC may consider the arrangement ineffective. So generally there is a 12 month minimum on change or what is termed a lifestyle change - of course about to go on maternity leave may be considered such a lifestyle change!!!
Any restriction is likely to be whatever the employer places on when change can be made in its scheme rules.
Jennifer Allen
4th November 2011
Is there anything in place to prevent employers ‘clawing back’ (from the employee) the cost of benefits provided to the employee on maternity leave, once the employee returns to work?
P Simon Parsons
4th November 2011
Hi Jennifer
Nothing legal beyond deferring some receovery.
So in teh case of general benefit provision - no - unless the employer wants to see themselves being persued for sex discrimination.
For elements which had lengths or terms associated with them such as Cycles, then the recover could be deferred to recommence on return to work, so the remainder of the term continues from the point of going on maternity leave when the employee returns.
paula
6th March 2012
Hi, if no change to contract was made which means CCV is classed as remuneration
(from your text) If no contractual change has actually been made, then the salary sacrifice fails and the benefit in kind is treated as cash pay. Equally, if the employee (or employer) can opt in and out of the arrangement at will, then this fails under a precedent set in the Heaton v Bell case where a benefit could be given up at any time to receive increased pay – as a consequence it was declared that the benefit was a chargeable emolument and therefore subject to PAYE and NICs.
And an employee wishes to continue with the purchase of the CCVs during a period of SMP only OMP, can we ask staff memebr to reimburse the cost of CCV?
P Simon Parsons
6th March 2012
Employees can purchase CCV at any time they like. What cannot operate is a Salary Sacrifice arrangement as SMP cannot be reduced, however, any consequential free benefit in kind provision of CCV must continue and no the sacrifice cannot be saved fro recovery from a future point in time.
Stephanie Jones
24th April 2012
If a new salary sacrifice scheme was introducted (for the part payment of private school fees), could the agreement state that if an employee is paid just SSP then during that period the benefit will be retracted and the fees will become due?
Amanda Harris
18th June 2012
If an employee is on maternity leave, in receipt of SMP and a car allowance (which is non-pensionable), can the 6% pension salary sacrifice of pre-maternity leave pay be deducted in full from the car allowance?
P Simon Parsons
18th June 2012
Hi Amanda. Yes, the salary sacrifice can be applied to any none statutory payment.
Surprising that you actually receive a car allowance on maternity leave, there is no statutory requirement for the employee to continue to pay car allowance (its cash and was used in the average pay calculation for SMP).
However, if you had a company car, you would be entitled to the company car use (it’s non-cash benefit in kind).
So, again, yes, the employer can apply the contractual pay change to any contractual pay (in this case car allowance).
Victoria
2nd July 2012
Hi,
My company operates a salary sacrifice arrangement whereby all my pension contributions are treated as employers (even my own 3% contribution). Now that I’m on SMP I was expecting them to fund this completely, as SMP could not be sacrificed under any circumstances. However they claim that for every month they pay me a bank holiday they can deduct money from my wages based on 3% of my full pay. This doesn’t take my take home pay below the SMP but seems very unfair as there is no contractual agreement to pay me the bank holidays, I would be just as happy to accrue them as time off in leau to be added to my maternity leave.
Any advise would be welcome.
Diane Allen
19th November 2012
Is there a benefit in kind implication for setting up a salary sacrifice scheme for childcare vouchers?
rhiannon
20th November 2012
We have an employee who purchased child care vouchers between 1/2/2008 and 1/9/2010.
This employee has since left our employment.
We changed our child care voucher provider earlier this year 2012
This x employee is now aking for a refund of monies he has in child care vouchers.
Are we obligated to give a refund? (minus tax and NI)
Our current agreement explicitly states that employees are not entitled to a refund but I can not find evidence of this with our previous agreement.
P Simoin Parsons
20th November 2012
No refund is due as you did not charge for the Child Care Vouchers, they were provided (even under a salary sacrifice arrangement) as a tax and NIC free benefit in kind.
So if you do make any refund, it is on a purely optional basis.
Andrew
22nd November 2012
Hi
Is it correct that subsequent salary increases are applied to the original and not the reduced salary (post sacrifice)?
Many thanks
P Simion Parsons
22nd November 2012
Not necessarily. This is depedent on how the employer constructs its salary sacrifice or flexible benefit arrangements. It would be common for employers to use the original pre-sacrifice amount for increases, however, there is no absolute requirement for it to be so.
Laura
9th March 2013
Hi. Would my child care vouchers continue for any unpaid period of my mat leave?
Sandra O'Keefe
25th March 2013
We run a Company Sick Pay scheme which pays the same as SSP. Would we be able to recover any of the salary exchange pension from this sum?
Thank you