03 Jul Salary sacrifice: The key changes and what to do about them
Phil Mitchell, a Corporate Consultant with Wren Sterling, outlines the key changes to Salary Sacrifice and why it is still a very useful tool for employers and employees
2016’s Autumn Statement included measures to reform salary sacrifice, one of the cornerstones of corporate financial planning. It wasn’t a complete surprise as the government had been lining up changes for some time, but now hard deadlines have been applied to areas outside of several notable exemptions.
It’s not all bad news for employers and employees. Existing schemes will be protected until April 2018 so there’s still quite a while to make the most of salary sacrifice in its current form.
The good news
The government has recognised the essential importance of some major salary sacrifice benefits. Pensions will be untouched, and there will be no change to childcare vouchers whatsoever, ensuring families are still able to plan for the future and receive much-needed assistance with childcare far beyond April 2018, and even 2021.
Cycle-to-work schemes and ultra-low emission (ULE) cars (CO2 emissions of up to 75g/km) will also be left alone.
The headline is that as of April 2017, most salary sacrifice schemes will be subject to the same tax as cash income. This means that employers can still offer these benefit programs, and that money will still come directly off an employee’s payslip, but neither the employee or their employer will receive a reduction in NI payments. Tax will effectively be paid before the money is taken out.
What happens next?
In the wake of these changes, there are two main considerations to be made:
- With demand being high, it will put a strain on suppliers. If you intend to run a salary sacrifice program, plan for it now and give your supplier notice.
- Keep in mind the dates when tax savings will expire. If you run a 12-month scheme, you and your employees will not be affected, but a longer program will, for the majority of benefits, see an increase in payments to the employee from April 2018. However, 12 months of saving can very much be viewed as better than nothing for your employees, provided the changes are clearly communicated from the outset.
For now, there is still time to make use of the current arrangements, while remaining safe in the knowledge that there will still be savings on childcare, cycle-to-work and ULE cars for years to come.
Why salary sacrifice is still relevant for employers and employees planning for retirement
Of the salary sacrifice benefits available, the one I spend most time advising on is pensions. For many businesses, the cost savings for even the most modest workforce can far outweigh any additional administrative burden. On the flip side, for employees it’s a powerful benefit that can increase loyalty. With demand being high, it will put a strain on suppliers. If you intend to run a salary sacrifice program, plan for it now and give your supplier notice. The idea behind it is simple. An employee agrees to give up part of their salary and, in return, you as an employer make increased employer contributions towards their pension.
As an employee’s overall pay is now lower, there is less National Insurance (NI) to pay. With employer NI currently at a staggering 13.8% and employee NI as much as 12% (2% for earnings over £827 p/w), this is no small saving.
Aside from the above, senior execs benefit from ‘instant tax relief’ at their highest marginal rate (subject to allowances). As contributions are effectively taken from an employee’s gross pay, this removes the need to reclaim higher rate tax relief via self-assessment or by adjustment to their tax code.
What’s in it for the business?
For any salary sacrifice arrangement the big benefit is employer NI savings, which in the case of pensions, can either be retained by the business or directed towards your employees’ pension pot. This gives you the ability to increase your employees’ pension without costing the business a penny extra.
Despite the headline benefits of salary sacrifice, there are some aspects to consider and plan around, including communicating clearly to your employees about exactly what is covered.
- If you provide employees with life cover based on a multiple of salary, this may need to be reviewed to take account of the employees ‘effective’ lower salary
- If an employee agrees to receive a lower salary, this could affect the amount they are able to borrow for a mortgage without further evidence
- An employee’s entitlement to certain state benefits, such as statutory maternity pay (SMP) may be affected
- Employer pension contributions during maternity leave may be higher than under a non-salary sacrifice arrangement
A sacrifice of salary cannot be allowed to take an employee below the minimum wage
An employee is not obliged to accept a salary sacrifice arrangement, but owing to auto enrolment, you are obliged to offer employees membership of a workplace pension – this may therefore result in a two tier structure
Case study: Using salary sacrifice to remunerate in a post-defined benefit world
One such circumstance where the above worked particularly well, was a large Scottish manufacturer with over 300 employees, many of which were highly skilled and well remunerated. After many years of business, the business opted to close its defined benefit (final salary/DB) scheme. It had identified that the promises associated with this type of pension scheme were becoming (and looked to continue to be) very expensive to honour, so the management had already closed the door to ‘new employees’ and had begun offering a group personal pension in its place.
Whilst the benefits of tax relief alone were apparent, the company wanted to do more to ensure that their scheme stood out from their peers, whilst also ‘softening the blow’ of ceasing DB scheme contributions for existing members going forward.
After a short discussion with payroll, it was agreed collectively that salary sacrifice would be offered and that the entire employer NI saving would be passed on to employees. This increased employees’ pension pot contributions, but without committing any further company funds. This also allowed the company to re-engage with staff and promote the benefits associated with pension saving as a whole, maximising its return on investment.