What is a Salary Sacrifice Scheme?

What is a Salary Sacrifice Scheme?

What is a Salary Sacrifice Scheme?

Salary sacrifice is a scheme whereby an employee gives up the right to receive part of the cash pay due under his/her contract of employment. Usually the sacrifice' is made in return for an employer to agree to provide some sort of non-cash benefit for the employee. The sacrifice' is achieved by varying the employee's terms and conditions of employment relating to their pay.

On considering a salary sacrifice scheme, employees need to be aware of what they are actually entitled to; the sacrifice' is a matter of employment law, not tax law. Once an employer and employee strike an agreement, the employee is giving up their contractual right to any future higher cash payment. Types of benefits received as opposed to money may include; a pension scheme; workplace nurseries; or childcare vouchers.

Any Business contemplating on entering into this scheme would be advised to seek legal advice as to whether their remuneration arrangement will achieve both parties' desired results. Alternatively, a UK payroll bureau can offer expert and confidential advice and assist organisations with the set-up of an efficient salary sacrifice scheme.

Employers must provide HM Revenue and Customs with full details surrounding the new contractual arrangements, if a Company decide on salary sacrifice. HMRC needs to be completely satisfied that the employee's entitlement to cash pay has been reduced, and a non cash pay benefit has been provided by the employer. In addition HMRC investigate the scheme arrangement, to ensure that the sacrifice' is not put in place to just meet the employee's own financial obligations.

A Salary sacrifice scheme allows staff to swap part of their gross salary for non-cash benefits provided by their employer. This is typically offered as part of a voluntary or flexible benefits package, enabling employees to save on tax and national insurance on the benefits offered. Additionally, another advantage of the scheme is that Employers save up to 12.8% on NIC's (National Insurance Contributions) on a portion of the employee's gross salary that is sacrificed.

Benefits to be expected by the salary sacrifice scheme vary considerably from a bicycle to car park allowance, pension schemes to health care. A more popular benefit in relation to salary sacrifice is the concept of childcare vouchers. The Vouchers give parents tax efficiency and financial support, so that they are able to return to work after the birth of a child, without the added worry of childcare cost. Employers can also reap the advantages of the childcare vouchers, as a recruitment process requires a lot of time and cost implications, therefore this can be avoided.

If employers decided to undertake the sacrifice' scheme they must ensure to instruct whoever deals with the company's wages or salaries, such as a UK Payroll bureau. This is to guarantee an effective payroll management for your organisation and clear representation of the employees benefits on payroll slips to avoid confusion.

HMRC guidance to an effective salary sacrifice is only if the contractual right to cash pay has been reduced, this can only be achieved when two conditions have been met. One being the potential future remuneration must be given up before it is treated as received for tax or NICs purposes. Another being the true construction is the revised contract of employment must be that the employee is entitled to lower cash remuneration and a benefit. For further information and professional advice and guidance contact your local UK payroll bureau.

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