Salary sacrifice schemes are not only for employees working for large companies. They can be used to create very flexible employee remuneration packages. All that is needed is a little imagination. By Nichola Ross Martin.
Under a salary sacrifice (SS) arrangement, an employee gives up the right to receive part of their pay under their contract of employment and in return the employee’s terms and conditions are varied and to take into consideration the provision by the employer of non-cash benefits and/or changes to working hours.
Salary sacrifice schemes are extremely useful because they create an element of flexibility into otherwise inflexible employment contracts. Different employees have different pay requirements, so that some may only want cash, others will appreciate tax free benefits or payments in kind in return for lower cash remuneration.
Typical salary sacrifice packages include the following benefits:
Flexible working arrangements and childcare or childcare vouchers
Since the advent of flexible working, many employees now work from home and as a result have changed their working hours to save their personal childcare costs and pick up children from school and nursery. These employees may also benefit from the provision of childcare vouchers. Cost savings will vary between employees, but a typical flexible working scheme that may allow an employee to leave the office early or work from home.
An employer can also give childcare vouchers to the value of up to £55 per week in exchange for approved and registered childminding and nursery fees.
Employer pension contributions
An employee may make a net contribution into their own scheme out of their net pay, but a more tax efficient method of pension funding is for the employer to make the contribution directly because of the saving in National Insurance.
Training course fees
Many employers will automatically pay all employees’ training requirements, but some employers will not foot the bill because although pay scales may be similar for certain jobs, training costs will be very variable.
An example of this came to light in the case of Consultant Psychiatrist v R&C Commrs [2006] SpC 557. The individual concerned was an employee of an NHS trust and her contract of employment listed what it considered essential and desirable training. The trust did not pay for the training, so she made a claim for tax relief on the £9,000 that she had personally laid out to fund what all parties acknowledged fell within the trust’s description of ‘desirable training’. The special commissioner held that the expenditure was not incurred ‘in the performance of the duties’ of the employment. Her duties were not to undergo training, even though it might be necessary to her holding her job and was, at least in part, something she was obliged to incur and pay as a holder of the employment. As a result the claim for tax relief failed. With hindsight a salary sacrifice scheme could have been set up so that the NHS Trust paid the training costs.
Other benefits
Other benefits will vary depending on the employee’s needs, but these might include employer paid car parking near the workplace, provision of cycling equipment, a mobile phone, glasses or health benefits. A small employer may suggest that all employees participate in salary sacrifice in return for employer providing lunch each day. The little things all build up, in ten years an employee will have probably paid over £12,000 just in lunch.
Many employees will have high regard for an employer who gives them options and where they can tailor make their own remuneration packages.
For a scheme to work properly, the employee gives up all contractual rights to future cash remuneration for the salary sacrificed in this way. This is a revision of the employment contract between employee and employer and must be that the employee is entitled to lower cash remuneration and a benefit. There can be no possibility for cash to be paid if the employee later decides that they do not want the non cash benefit after all. The scheme will be irrevocable, and without consideration.
In practice, SS schemes are reviewed on a timely basis and when an employee no longer wants or wants to vary the non cash or cash element of their contract. This may be done on an annual basis following an annual employee assessment. Changes to the contract must be made before there is any contractural entitlement.
For example, an employee may SS in return for an employer-provided nursery place. Assuming that the employer has set up the nursery provision correctly, any benefit is provided tax-free and national insurance free. Providing that the employee has made the SS in advance and cannot revert back to their original remuneration package of a higher salary and no benefits, the nursery benefit will be tax-free.
If the employee subsequently decides that he does not like the nursery and requests reinstatement of the original salary, the scheme will have failed and the salary previously sacrificed will become taxable in full. If a transaction of a particular type attracts tax, that tax cannot be avoided by dressing the transaction up in a different guise or calling it by another name.
Reporting requirements
There are no reporting requirements for SS schemes, but a sensible employer will contact their tax office to run through the scheme and double check that all conditions have been fulfilled. These can be accessed on HMRC’s website. A successful SS makes a permanent change to an employee’s employment contract and so both employer and employee should follow the modified contract. If they do so, it will be very hard for HMRC to make a challenge of any sort.
As far as P11D reporting goes, if there is a tax-exempt benefit there will be no need to put this onto a return.
