Salary Sacrifice And Optional Remuneration
SALARY SACRIFICE AND OPTIONAL REMUNERATION The principle of a salary sacrifice is that an employee forgoes the right to receive part of contractual pay, which may include salary or wages, annual bonus or cash allowance, in return for an agreement that the employer will provide some form of non-cash benefit such as: • a contribution to an employee’s pension scheme • the provision of childcare vouchers • an employer-provided bicycle COPYRIGHT © 2021 THE CHARTERED INSTITUTE OF PAYROLL PROFESSIONALS No printing, opying or reproduction permitted. and that such provision may result in NICs and/or tax savings. A scheme where a deduction from net pay is used to ‘purchase’ a benefit will not benefit from NICs and/or tax savings as it will be classed by HMRC as an unsuccessful salary sacrifice, the employee still being able to decide how to apportion the net pay. Schemes have been termed as “diverted pay” or “optional remuneration” arrangements, however these all are ways of describing salary sacrifice. Salary sacrifice scheme rules must ensure that: • potential future salary or bonus is sacrificed before it is treated as received for tax or NICs purposes and that there is an audit trail to support this assertion. (N.B. many employers take a cautious view that an agreement to sacrifice needs to be completed before the pay becomes taxable, which could be deemed to be as early as the 6th of the month in which the wage or salary payment is due • there is a genuine reconstruction of the contract between employer and employee to reflect a lower cash remuneration, and the provision in return of a non-cash benefit • the employee’s pay is not reduced to a level below the National Minimum or Living Wage and ideally not below the LEL. This requirement is being discussed as part of the review of the Low Pay Commission’s work post 2020 because of the fact that salary sacrifice involves the employee voluntarily giving up pay and is not a deduction for the benefit of the employer. If the employee is able to give up the benefit at any time resulting in a return to the original ‘cash’ salary the sacrifice could be both ineffective and chargeable to tax and Class 1 NICs in full. This does not apply to the following benefits where employees may opt-in and out of a sacrifice as often as they wish, or amend the amount so sacrificed as long as this is done before the gross to net is run: All types of employer supported or provided childcare, bicycles and bicycle safety equipment, workplace parking, pension membership (during the statutory opt-out period). Apart from these benefits changes can be made a maximum of, annually or, when certain ‘lifestyle events’ occur, e.g. the birth of a child, redundancy of a partner. In essence these should be significant changes that materially affect the employee’s personal circumstances that are irregular and could not have been foreseen at the outset (opting-out of a pension scheme within the prescribed “opt-out” period is now included in this definition). It should be recognised by both parties that other benefits might be affected by the adoption of a salary sacrifice scheme: • reduced contributory related benefits e.g. Employment and Support Allowance
129
Made with FlippingBook - Online magazine maker