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Payroll: Salary Sacrifice

Employers are increasingly using salary sacrifice to manage employee remuneration. This raises the employee’s perceived value of their reward package, and forms a large part of Human Capital Management. But times have changed from the original aim of flexible benefit schemes: which was to adapt salary packages to be of more advantage to the employee, without additional cost to the employer. Now more employee package elements are based on employer cost savings, primarily at the government's expense.

The Lighter Side

Since February 2005, HMRC has allowed employers to operate benefits schemes in whatever way they wish: original salary, reduced salary, notional pay, pre-tax and pre-NI deductions and all combinations in-between are now permitted to be applied. What the HMRC inspector will be interested in when finding such arrangements, are copies of the revised contractual arrangements between the employer and employee. If revised arrangements exist then the salary sacrifice is in good standing and any qualifying advantages with regard to the correct operation of tax and NICs apply.

What's the catch?

If evidence of the employer's revised contractual Tax Avoidance Disclosurearrangements with their employees cannot be provided, then the employer will find themselves presented with the bill for the underpayment of tax and NICs along with associated fines and penalties.

Employers also need to ensure that they do not fall foul of the new Tax Avoidance Disclosure (TAD) regime. The government is determined to ensure that all employers and employees pay the correct amount of tax and National Insurance Contributions (NICs). Since 1 May 2007 the TAD legislation additionally incorporates NICs with regard to avoidance schemes, obliging employers to disclose.

Nothing specifically excludes salary sacrifice arrangements … from disclosure. HMRC

However, HMRC expects very few such schemes to be notifiable because they fall out at some stage of the tests.

HMRC does not expect childcare voucher schemes to need disclosing. Ultimately it is for promoters and payroll managers to decide whether they have to disclose a particular scheme.

Some important points

Opting for salary sacrifice means a contractual change in employment terms and conditions has occurred. During periods of ordinary maternity, paternity and adoption leave, employers are legally obliged to continue to provide all contractual benefits. Salary Sacrifice cannot occur against the statutory payments received by the employees during these periods (the payments rates are already calculated on the lower earnings amounts after salary sacrifice), so the benefits must continue to be provided with any associated costs being met by the employer.

With the increasing and popular use of Smart Pensions Contractually based employer contributions must continue to be paid by the employeror similar schemes, employers need to recognise that during any paid period of parental leave (such as maternity and adoption), any contractually based employer contributions for money purchase schemes -  or even personal pensions - must continue to be paid by the employer. This is the case, even if the payment period extends beyond the ordinary parental leave periods, as is now the case for both maternity and adoption. These employer contributions have to continue to be based on the employee’s normal in-work earnings and, unlike any employee contributions, not on the reduced parental leave payments. So employers need to be smart about salary sacrifice pensions: understand your true continuing liabilities.

In our next edition: Free tips on NICs efficient flexible benefits schemes.

Interested in Salary Sacrifice schemes? Contact us for more information.

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