Salary Sacrifice. More Than Just a Payroll Adjustment
Salary sacrifice is becoming increasingly popular, particularly for workplace pensions and company cars. It can provide tax and National Insurance advantages, but it is important to remember that salary sacrifice is a contractual arrangement, not simply a different way of processing something through payroll.
- Author
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Tracey Hand
Under a salary sacrifice arrangement, an employee agrees to give up part of their contractual salary in exchange for a non-cash benefit, such as an employer pension contribution or a company car.
Because the employee is giving up a contractual right to salary, the arrangement should be properly documented.
A contract variation must be put in place BEFORE the salary sacrifice starts and whenever the amount being sacrificed changes.
For example, if an employee increases their pension salary sacrifice from £200 to £300 per month, the contractual salary should be updated to reflect the new arrangement.
The employee must also genuinely give up the right to the sacrificed salary. It should not simply be treated as an optional payroll deduction that the employee can switch between salary and the benefit without the contractual arrangements being changed.
Things employers should also consider
There are a few other areas to keep in mind when introducing salary sacrifice:
National Minimum Wage: salary sacrifice cannot reduce an employee's pay below the applicable National Minimum Wage.
Statutory payments: reducing contractual salary can affect the calculation of certain statutory payments and benefits.
Other salary-related payments: employers should consider whether the reduced contractual salary affects overtime, bonuses, holiday pay or other benefits under their employment terms.
Maternity leave obligations: The employer must continue the “benefit” whilst an employee is on maternity leave, even if the employee themselves is not contributing.
Pension salary sacrifice: the sacrificed amount becomes an employer pension contribution rather than an employee pension deduction.
Company cars: salary sacrifice does not remove the benefit-in-kind tax rules. The company car benefit still needs to be dealt with correctly through payroll and/or P11D reporting.
Changes and cancellations: if an employee changes their sacrifice amount, changes their vehicle or ends the arrangement, the contractual position should be reviewed and updated accordingly.
From a payroll perspective, the amount being processed should therefore always agree with the current contractual salary sacrifice arrangement.
Salary sacrifice can be a valuable benefit for both employers and employees, but it is important that the paperwork keeps pace with the payroll.
A payroll adjustment on its own does not create a valid salary sacrifice arrangement.