Demonstrating a return on benefits expenditure investment is now expected of most HR and reward teams. But while this can be tricky to achieve for some perks, benefits offered tax-efficiently through a salary sacrifice arrangement are a far easier sell because they result in savings for both the employee and employer.
Under the terms of salary sacrifice, employees agree to give up the right to a portion of their cash salary due under their contract of employment.
This sacrifice is typically made in return for their employer’s agreement to provide them with some form of non-cash benefit. Where benefits qualify for tax exemptions, they are free from tax and class 1A National Insurance contributions (NICs) for staff, which would both have been fully payable had they simply continued to take the portion of salary sacrificed in exchange for the perk. Employers, meanwhile, can save up to 12.8 per cent on NICs due on the portion of employees’ gross salary that has been sacrificed.
Jon Bryant, regional director, benefits and communication at Jardine Lloyd Thompson, says: “There are a core group of salary sacrifice benefits that organisations are offering, or looking to offer.”
One which has the potential to produce the greatest savings for organisations is salary sacrificing pension contributions. Employees in a defined contribution plan agree to give up a portion of their salary in return for this going directly into their pension from their employer. Some organisations also re-invest their employers’ NI savings in the form of additional contributions for staff. Martha How, head of reward at Hewitt Associates, says: “Pensions salary sacrifice has expanded hugely in the UK in the last few years. It is now a pretty mainstream offer.”
Alternatively, organisations could use their employers’ savings on NICs to shore up the deficit of their defined benefit pension scheme, says Bryant.
Along with pension contributions, childcare vouchers are one of the most popular benefits that can be offered through salary sacrifice. Childcare voucher schemes enable staff to sacrifice up to £55 a week or £243 a month from their gross salary to purchase vouchers that are accepted at any approved childcare provider. These can then be used in full or part payment at a wide range of childcare providers, including a nanny, au pair, workplace nursery, external nursery or crèche until the child is aged 15 years, or until the age of 16 years if they are disabled.
“After childcare vouchers, the take up of other salary sacrifice benefits falls away quite a lot. The reason childcare vouchers do so much better is there is much more in it for employers and employees,” says How.
She adds, however, that take-up can be relatively low as the benefit’s appeal is limited to working parents. “It’s not a disappointing take-up rate, it just reflects the workforce demographics,” she explains.
Bicycle loans, which are also known as bikes-for-work schemes, meanwhile, are a government-sponsored initiative designed to promote greener transport. Staff sacrifice a portion of their salary in return for their employer’s agreement to supply them with a bicycle and any relevant safety equipment on loan for a set hire period, which is typically set at 18 months although this is fixed at employers’ discretion. Employers that purchase the bikes outright can also reclaim the VAT on them, which they may choose to pass on to employees.
The equipment remains the property of the employer until the end of the loan period, when staff are given the opportunity to purchase it from their net salary at a fair market rate.
In order to qualify for the tax exemption, however, staff must use their bicycle for at least part of their journey between their home and work, or between workplaces. Last year, the Department for Transport re-iterated that the tax savings can only be made on bicycles which are loaned to staff by an employer, so schemes should not be marketed as an opportunity for employees to purchase discounted bikes.
Alistair Kendrick, partner at Bourne Business Consulting, says advisers should ensure organisations’ schemes adhere to the terms of the legislation so they qualify as an effective salary sacrifice. “I have heard of examples where schemes have included exercise bikes. Also, if you’re allowing people to buy bikes for children, these are clearly not qualifying bikes,” he explains.
Advisers setting up a bikes-for-work scheme should also ensure clients are covered by a group consumer credit licence that can be obtained from the Office of Fair Trading for all equipment up to the value of £1,000 (including VAT) and before any income tax is deducted. If they wish to offer staff equipment above this value, they must apply for a standard consumer credit licence.
While these benefits are offered fairly widely by employers, the specific requirements and demands of several other options means they are not typically as popular. Car parking, whereby employers typically offer staff a season ticket for a car park near their place of work paid for via salary sacrifice, is one such example. In order to qualify for the tax exemptions, schemes must meet strict criteria, which state they can only be used to pay for parking ‘at or near to’ an employee’s place of work, so it cannot be used to pay for parking at a train station near to their home, for example.
Offering bus travel through salary sacrifice, meanwhile, enables employers to provide staff with the opportunity to pay for an annual bus pass on a monthly basis through salary sacrifice. Setting up such a scheme will involve negotiations with local bus companies and HM Revenue and Customs [HMRC] in order to gain all necessary agreement.
Understanding the criteria to which some salary sacrifice perks must adhere, however, is not always clear cut. Mobile phone loans have often been viewed as something of a grey area. After some confusion, HMRC’s guidance now states that a mobile phone constitutes apparatus that is designed, or adapted for, the primary purpose of transmitting and receiving spoken messages, and which is used in connection with a public electronics communications service. As personal digital assistants (PDAs) and Blackberrys now include a number of additional functions that mean they have in more in common with computer equipment, they are not eligible for the tax break.
To comply with tax regulations, employees can only take up one mobile phone, which must be owned by the employer and then loaned to the employee for an agreed period, typically set at 12 months, but which can be extended to 18 months.
One of the newer salary sacrifice arrangements now offered by employers is meals in on-site canteens. “We’re seeing a lot more restaurant schemes going in now,” says How.
Tax savings are made when employees sacrifice a portion of their gross salary to spend on food in on-site restaurants. Most organisations that have implemented such arrangements have issued staff with a pre-paid card to use as this is often considered the easiest method of managing the cash that has been sacrificed and tracking where payments are made. Schemes will be examined by local tax offices on a case-by-case basis.
Towards the end of last year, however, HMRC appeared to be clamping down on such schemes after sending out letters to employers offering this type of salary sacrifice, warning them their scheme may not be effective because employees had retained too much control over how the tax-free money was spent.
A spokesperson for HMRC said: “Generally speaking, the employee must have given up their entitlement to receive the amount of cash salary sacrificed before they are entitled to receive it for the arrangement to be effective to tax/NICs purposes. HMRC has seen a number of cases involving arrangements that purport to combine salary sacrifice arrangements that are effective for tax and NICs purposes with the long-standing tax exemption for subsidised meals. HMRC does not accept that the tax exemption is necessarily applicable in these cases.”
How adds HMRC is increasingly likely to challenge salary sacrifice arrangements if it views these as a form of tax avoidance. “There is increasing HMRC pressure around full and proper salary sacrifice construction. Advisers need a little bit of caution.”
If salary sacrifice arrangements are correctly structured, the savings can be such that you would be forgiven for thinking all employers would be rushing to implement them. But many organisations have not yet done so. Mark Carman, marketing and communications director at Motivano, says: “If they can do it, we say ‘if you have the opportunity to make money, you should do it. But a lot of employers think there is a lot of work involved.”
Advisers should bear in mind, however, that salary sacrifice arrangements are not suitable for every organisation. Employees on, or near to, the national minimum wage, for example, cannot sacrifice their salary so their net pay falls below the minimum level, meaning they are unable to take advantage of salary sacrifice perks. Some employers, therefore, may choose not to implement such schemes if not all staff can utilise them, and in some cases, reduction in pay can have an adverse effect on state second pension.
Other employers, however, may simply be unaware of the options that are available or the possible savings. Where this is an organisation’s main reason for not introducing salary sacrifice, this can present an opportunity for advisers and providers to sell in such a scheme.
In addition, the time needed to implement a scheme may prove to be a problem for some employers. “A lot of reward professionals are so overworked, they don’t have the time to set salary sacrifice up,” says Bryant.
Advisers should also bear in mind that employers will only maximise their chances of achieving the best possible savings on salary sacrifice if the benefits obtain a good level of take-up. Understanding a client’s workforce and its requirements, therefore, is vital before implementing a scheme. “The important thing is to start with what clients’ employees want from a scheme. You can waste time setting up a salary sacrifice scheme that has limited interest. You have to really work with a client to understand what is available and what employees might be interested in,” says Kendrick.
Regardless of the savings that are up for grabs, employers should be sure that they are introducing schemes for the right reasons, such as to assist with recruitment and retention, says Inez Anderson, a director at Smith and Williamson. “Employers and anyone advising them have to say ‘why are you doing this’ and ‘what do you want to achieve?'” she concludes. But for anyone looking to offer benefits in an affordable way, salary sacrifice will fit the bill.
Expert view – Sacrifice under the knife?
The Government’s removal of the tax exemption around the home computing initiative (HCI) in 2006, caught much of the employee benefits industry unaware. Since then, there has been much speculation over the future for salary sacrifice perks and how long the government is likely to permit them to continue. This debate was fuelled by the withdrawal of the tax break around holiday pay schemes in last year’s pre-Budget report.
There appears to be a consensus within the benefits industry that advisers and employers should continue to take advantage of salary sacrifice schemes while these are available. Mark Carman, marketing and communications director at Motivano, for example, believes HCI schemes would have fizzled out even if the government hadn’t pulled the plug on them, as falling prices may have reduced their appeal to staff.
Jon Bryant, regional director, benefits and communication at Jardine Lloyd Thompson, also feels the Government is unlikely to withdraw salary sacrifice schemes in the near future. He believes the pensions changes such as auto-enrolment, which are due to come into effect in 2012, will instead be a watershed for salary sacrifice.
“The question is will the government allow employers to auto-enrol employees into salary sacrifice pension schemes? If the answer is no, I see that being the death knell for salary sacrifice. Up until then, I can’t see the Government doing very much about it,” he explains.
However, Martha How, head of reward at Hewitt Associates, believes advisers should proceed with caution until the contents of this year’s Budget are announced. “I would wait until the next Budget if I was looking at a brand new salary sacrifice scheme now. If advisers want to put in salary sacrifice around bikes and canteens I would do the design work and hold back. Once the Budget has come out, I think we will.
Demonstrating a return on benefits expenditure investment is now expected of most HR and reward teams. But while this can be tricky to achieve for some perks, benefits offered tax-efficiently through a salary sacrifice arrangement are a far easier sell because they result in savings for both the employee and employer.
Under the terms of salary sacrifice, employees agree to give up the right to a portion of their cash salary due under their contract of employment.
This sacrifice is typically made in return for their employer’s agreement to provide them with some form of non-cash benefit. Where benefits qualify for tax exemptions, they are free from tax and class 1A National Insurance contributions (NICs) for staff, which would both have been fully payable had they simply continued to take the portion of salary sacrificed in exchange for the perk. Employers, meanwhile, can save up to 12.8 per cent on NICs due on the portion of employees’ gross salary that has been sacrificed.
Jon Bryant, regional director, benefits and communication at Jardine Lloyd Thompson, says: “There are a core group of salary sacrifice benefits that organisations are offering, or looking to offer.”
One which has the potential to produce the greatest savings for organisations is salary sacrificing pension contributions. Employees in a defined contribution plan agree to give up a portion of their salary in return for this going directly into their pension from their employer. Some organisations also re-invest their employers’ NI savings in the form of additional contributions for staff. Martha How, head of reward at Hewitt Associates, says: “Pensions salary sacrifice has expanded hugely in the UK in the last few years. It is now a pretty mainstream offer.”
Alternatively, organisations could use their employers’ savings on NICs to shore up the deficit of their defined benefit pension scheme, says Bryant.
Along with pension contributions, childcare vouchers are one of the most popular benefits that can be offered through salary sacrifice. Childcare voucher schemes enable staff to sacrifice up to £55 a week or £243 a month from their gross salary to purchase vouchers that are accepted at any approved childcare provider. These can then be used in full or part payment at a wide range of childcare providers, including a nanny, au pair, workplace nursery, external nursery or crèche until the child is aged 15 years, or until the age of 16 years if they are disabled.
“After childcare vouchers, the take up of other salary sacrifice benefits falls away quite a lot. The reason childcare vouchers do so much better is there is much more in it for employers and employees,” says How.
She adds, however, that take-up can be relatively low as the benefit’s appeal is limited to working parents. “It’s not a disappointing take-up rate, it just reflects the workforce demographics,” she explains.
Bicycle loans, which are also known as bikes-for-work schemes, meanwhile, are a government-sponsored initiative designed to promote greener transport. Staff sacrifice a portion of their salary in return for their employer’s agreement to supply them with a bicycle and any relevant safety equipment on loan for a set hire period, which is typically set at 18 months although this is fixed at employers’ discretion. Employers that purchase the bikes outright can also reclaim the VAT on them, which they may choose to pass on to employees.
The equipment remains the property of the employer until the end of the loan period, when staff are given the opportunity to purchase it from their net salary at a fair market rate.
In order to qualify for the tax exemption, however, staff must use their bicycle for at least part of their journey between their home and work, or between workplaces. Last year, the Department for Transport re-iterated that the tax savings can only be made on bicycles which are loaned to staff by an employer, so schemes should not be marketed as an opportunity for employees to purchase discounted bikes.
Alistair Kendrick, partner at Bourne Business Consulting, says advisers should ensure organisations’ schemes adhere to the terms of the legislation so they qualify as an effective salary sacrifice. “I have heard of examples where schemes have included exercise bikes. Also, if you’re allowing people to buy bikes for children, these are clearly not qualifying bikes,” he explains.
Advisers setting up a bikes-for-work scheme should also ensure clients are covered by a group consumer credit licence that can be obtained from the Office of Fair Trading for all equipment up to the value of £1,000 (including VAT) and before any income tax is deducted. If they wish to offer staff equipment above this value, they must apply for a standard consumer credit licence.
While these benefits are offered fairly widely by employers, the specific requirements and demands of several other options means they are not typically as popular. Car parking, whereby employers typically offer staff a season ticket for a car park near their place of work paid for via salary sacrifice, is one such example. In order to qualify for the tax exemptions, schemes must meet strict criteria, which state they can only be used to pay for parking ‘at or near to’ an employee’s place of work, so it cannot be used to pay for parking at a train station near to their home, for example.
Offering bus travel through salary sacrifice, meanwhile, enables employers to provide staff with the opportunity to pay for an annual bus pass on a monthly basis through salary sacrifice. Setting up such a scheme will involve negotiations with local bus companies and HM Revenue and Customs [HMRC] in order to gain all necessary agreement.
Understanding the criteria to which some salary sacrifice perks must adhere, however, is not always clear cut. Mobile phone loans have often been viewed as something of a grey area. After some confusion, HMRC’s guidance now states that a mobile phone constitutes apparatus that is designed, or adapted for, the primary purpose of transmitting and receiving spoken messages, and which is used in connection with a public electronics communications service. As personal digital assistants (PDAs) and Blackberrys now include a number of additional functions that mean they have in more in common with computer equipment, they are not eligible for the tax break.
To comply with tax regulations, employees can only take up one mobile phone, which must be owned by the employer and then loaned to the employee for an agreed period, typically set at 12 months, but which can be extended to 18 months.
One of the newer salary sacrifice arrangements now offered by employers is meals in on-site canteens. “We’re seeing a lot more restaurant schemes going in now,” says How.
Tax savings are made when employees sacrifice a portion of their gross salary to spend on food in on-site restaurants. Most organisations that have implemented such arrangements have issued staff with a pre-paid card to use as this is often considered the easiest method of managing the cash that has been sacrificed and tracking where payments are made. Schemes will be examined by local tax offices on a case-by-case basis.
Towards the end of last year, however, HMRC appeared to be clamping down on such schemes after sending out letters to employers offering this type of salary sacrifice, warning them their scheme may not be effective because employees had retained too much control over how the tax-free money was spent.
A spokesperson for HMRC said: “Generally speaking, the employee must have given up their entitlement to receive the amount of cash salary sacrificed before they are entitled to receive it for the arrangement to be effective to tax/NICs purposes. HMRC has seen a number of cases involving arrangements that purport to combine salary sacrifice arrangements that are effective for tax and NICs purposes with the long-standing tax exemption for subsidised meals. HMRC does not accept that the tax exemption is necessarily applicable in these cases.”
How adds HMRC is increasingly likely to challenge salary sacrifice arrangements if it views these as a form of tax avoidance. “There is increasing HMRC pressure around full and proper salary sacrifice construction. Advisers need a little bit of caution.”
If salary sacrifice arrangements are correctly structured, the savings can be such that you would be forgiven for thinking all employers would be rushing to implement them. But many organisations have not yet done so. Mark Carman, marketing and communications director at Motivano, says: “If they can do it, we say ‘if you have the opportunity to make money, you should do it. But a lot of employers think there is a lot of work involved.”
Advisers should bear in mind, however, that salary sacrifice arrangements are not suitable for every organisation. Employees on, or near to, the national minimum wage, for example, cannot sacrifice their salary so their net pay falls below the minimum level, meaning they are unable to take advantage of salary sacrifice perks. Some employers, therefore, may choose not to implement such schemes if not all staff can utilise them, and in some cases, reduction in pay can have an adverse effect on state second pension.
Other employers, however, may simply be unaware of the options that are available or the possible savings. Where this is an organisation’s main reason for not introducing salary sacrifice, this can present an opportunity for advisers and providers to sell in such a scheme.
In addition, the time needed to implement a scheme may prove to be a problem for some employers. “A lot of reward professionals are so overworked, they don’t have the time to set salary sacrifice up,” says Bryant.
Advisers should also bear in mind that employers will only maximise their chances of achieving the best possible savings on salary sacrifice if the benefits obtain a good level of take-up. Understanding a client’s workforce and its requirements, therefore, is vital before implementing a scheme. “The important thing is to start with what clients’ employees want from a scheme. You can waste time setting up a salary sacrifice scheme that has limited interest. You have to really work with a client to understand what is available and what employees might be interested in,” says Kendrick.
Regardless of the savings that are up for grabs, employers should be sure that they are introducing schemes for the right reasons, such as to assist with recruitment and retention, says Inez Anderson, a director at Smith and Williamson. “Employers and anyone advising them have to say ‘why are you doing this’ and ‘what do you want to achieve?'” she concludes. But for anyone looking to offer benefits in an affordable way, salary sacrifice will fit the bill.
Expert view – Sacrifice under the knife?
The Government’s removal of the tax exemption around the home computing initiative (HCI) in 2006, caught much of the employee benefits industry unaware. Since then, there has been much speculation over the future for salary sacrifice perks and how long the government is likely to permit them to continue. This debate was fuelled by the withdrawal of the tax break around holiday pay schemes in last year’s pre-Budget report.
There appears to be a consensus within the benefits industry that advisers and employers should continue to take advantage of salary sacrifice schemes while these are available. Mark Carman, marketing and communications director at Motivano, for example, believes HCI schemes would have fizzled out even if the government hadn’t pulled the plug on them, as falling prices may have reduced their appeal to staff.
Jon Bryant, regional director, benefits and communication at Jardine Lloyd Thompson, also feels the Government is unlikely to withdraw salary sacrifice schemes in the near future. He believes the pensions changes such as auto-enrolment, which are due to come into effect in 2012, will instead be a watershed for salary sacrifice.
“The question is will the government allow employers to auto-enrol employees into salary sacrifice pension schemes? If the answer is no, I see that being the death knell for salary sacrifice. Up until then, I can’t see the Government doing very much about it,” he explains.
However, Martha How, head of reward at Hewitt Associates, believes advisers should proceed with caution until the contents of this year’s Budget are announced. “I would wait until the next Budget if I was looking at a brand new salary sacrifice scheme now. If advisers want to put in salary sacrifice around bikes and canteens I would do the design work and hold back. Once the Budget has come out, I think we will.
Demonstrating a return on benefits expenditure investment is now expected of most HR and reward teams. But while this can be tricky to achieve for some perks, benefits offered tax-efficiently through a salary sacrifice arrangement are a far easier sell because they result in savings for both the employee and employer.
Under the terms of salary sacrifice, employees agree to give up the right to a portion of their cash salary due under their contract of employment.
This sacrifice is typically made in return for their employer’s agreement to provide them with some form of non-cash benefit. Where benefits qualify for tax exemptions, they are free from tax and class 1A National Insurance contributions (NICs) for staff, which would both have been fully payable had they simply continued to take the portion of salary sacrificed in exchange for the perk. Employers, meanwhile, can save up to 12.8 per cent on NICs due on the portion of employees’ gross salary that has been sacrificed.
Jon Bryant, regional director, benefits and communication at Jardine Lloyd Thompson, says: “There are a core group of salary sacrifice benefits that organisations are offering, or looking to offer.”
One which has the potential to produce the greatest savings for organisations is salary sacrificing pension contributions. Employees in a defined contribution plan agree to give up a portion of their salary in return for this going directly into their pension from their employer. Some organisations also re-invest their employers’ NI savings in the form of additional contributions for staff. Martha How, head of reward at Hewitt Associates, says: “Pensions salary sacrifice has expanded hugely in the UK in the last few years. It is now a pretty mainstream offer.”
Alternatively, organisations could use their employers’ savings on NICs to shore up the deficit of their defined benefit pension scheme, says Bryant.
Along with pension contributions, childcare vouchers are one of the most popular benefits that can be offered through salary sacrifice. Childcare voucher schemes enable staff to sacrifice up to £55 a week or £243 a month from their gross salary to purchase vouchers that are accepted at any approved childcare provider. These can then be used in full or part payment at a wide range of childcare providers, including a nanny, au pair, workplace nursery, external nursery or crèche until the child is aged 15 years, or until the age of 16 years if they are disabled.
“After childcare vouchers, the take up of other salary sacrifice benefits falls away quite a lot. The reason childcare vouchers do so much better is there is much more in it for employers and employees,” says How.
She adds, however, that take-up can be relatively low as the benefit’s appeal is limited to working parents. “It’s not a disappointing take-up rate, it just reflects the workforce demographics,” she explains.
Bicycle loans, which are also known as bikes-for-work schemes, meanwhile, are a government-sponsored initiative designed to promote greener transport. Staff sacrifice a portion of their salary in return for their employer’s agreement to supply them with a bicycle and any relevant safety equipment on loan for a set hire period, which is typically set at 18 months although this is fixed at employers’ discretion. Employers that purchase the bikes outright can also reclaim the VAT on them, which they may choose to pass on to employees.
The equipment remains the property of the employer until the end of the loan period, when staff are given the opportunity to purchase it from their net salary at a fair market rate.
In order to qualify for the tax exemption, however, staff must use their bicycle for at least part of their journey between their home and work, or between workplaces. Last year, the Department for Transport re-iterated that the tax savings can only be made on bicycles which are loaned to staff by an employer, so schemes should not be marketed as an opportunity for employees to purchase discounted bikes.
Alistair Kendrick, partner at Bourne Business Consulting, says advisers should ensure organisations’ schemes adhere to the terms of the legislation so they qualify as an effective salary sacrifice. “I have heard of examples where schemes have included exercise bikes. Also, if you’re allowing people to buy bikes for children, these are clearly not qualifying bikes,” he explains.
Advisers setting up a bikes-for-work scheme should also ensure clients are covered by a group consumer credit licence that can be obtained from the Office of Fair Trading for all equipment up to the value of £1,000 (including VAT) and before any income tax is deducted. If they wish to offer staff equipment above this value, they must apply for a standard consumer credit licence.
While these benefits are offered fairly widely by employers, the specific requirements and demands of several other options means they are not typically as popular. Car parking, whereby employers typically offer staff a season ticket for a car park near their place of work paid for via salary sacrifice, is one such example. In order to qualify for the tax exemptions, schemes must meet strict criteria, which state they can only be used to pay for parking ‘at or near to’ an employee’s place of work, so it cannot be used to pay for parking at a train station near to their home, for example.
Offering bus travel through salary sacrifice, meanwhile, enables employers to provide staff with the opportunity to pay for an annual bus pass on a monthly basis through salary sacrifice. Setting up such a scheme will involve negotiations with local bus companies and HM Revenue and Customs [HMRC] in order to gain all necessary agreement.
Understanding the criteria to which some salary sacrifice perks must adhere, however, is not always clear cut. Mobile phone loans have often been viewed as something of a grey area. After some confusion, HMRC’s guidance now states that a mobile phone constitutes apparatus that is designed, or adapted for, the primary purpose of transmitting and receiving spoken messages, and which is used in connection with a public electronics communications service. As personal digital assistants (PDAs) and Blackberrys now include a number of additional functions that mean they have in more in common with computer equipment, they are not eligible for the tax break.
To comply with tax regulations, employees can only take up one mobile phone, which must be owned by the employer and then loaned to the employee for an agreed period, typically set at 12 months, but which can be extended to 18 months.
One of the newer salary sacrifice arrangements now offered by employers is meals in on-site canteens. “We’re seeing a lot more restaurant schemes going in now,” says How.
Tax savings are made when employees sacrifice a portion of their gross salary to spend on food in on-site restaurants. Most organisations that have implemented such arrangements have issued staff with a pre-paid card to use as this is often considered the easiest method of managing the cash that has been sacrificed and tracking where payments are made. Schemes will be examined by local tax offices on a case-by-case basis.
Towards the end of last year, however, HMRC appeared to be clamping down on such schemes after sending out letters to employers offering this type of salary sacrifice, warning them their scheme may not be effective because employees had retained too much control over how the tax-free money was spent.
A spokesperson for HMRC said: “Generally speaking, the employee must have given up their entitlement to receive the amount of cash salary sacrificed before they are entitled to receive it for the arrangement to be effective to tax/NICs purposes. HMRC has seen a number of cases involving arrangements that purport to combine salary sacrifice arrangements that are effective for tax and NICs purposes with the long-standing tax exemption for subsidised meals. HMRC does not accept that the tax exemption is necessarily applicable in these cases.”
How adds HMRC is increasingly likely to challenge salary sacrifice arrangements if it views these as a form of tax avoidance. “There is increasing HMRC pressure around full and proper salary sacrifice construction. Advisers need a little bit of caution.”
If salary sacrifice arrangements are correctly structured, the savings can be such that you would be forgiven for thinking all employers would be rushing to implement them. But many organisations have not yet done so. Mark Carman, marketing and communications director at Motivano, says: “If they can do it, we say ‘if you have the opportunity to make money, you should do it. But a lot of employers think there is a lot of work involved.”
Advisers should bear in mind, however, that salary sacrifice arrangements are not suitable for every organisation. Employees on, or near to, the national minimum wage, for example, cannot sacrifice their salary so their net pay falls below the minimum level, meaning they are unable to take advantage of salary sacrifice perks. Some employers, therefore, may choose not to implement such schemes if not all staff can utilise them, and in some cases, reduction in pay can have an adverse effect on state second pension.
Other employers, however, may simply be unaware of the options that are available or the possible savings. Where this is an organisation’s main reason for not introducing salary sacrifice, this can present an opportunity for advisers and providers to sell in such a scheme.
In addition, the time needed to implement a scheme may prove to be a problem for some employers. “A lot of reward professionals are so overworked, they don’t have the time to set salary sacrifice up,” says Bryant.
Advisers should also bear in mind that employers will only maximise their chances of achieving the best possible savings on salary sacrifice if the benefits obtain a good level of take-up. Understanding a client’s workforce and its requirements, therefore, is vital before implementing a scheme. “The important thing is to start with what clients’ employees want from a scheme. You can waste time setting up a salary sacrifice scheme that has limited interest. You have to really work with a client to understand what is available and what employees might be interested in,” says Kendrick.
Regardless of the savings that are up for grabs, employers should be sure that they are introducing schemes for the right reasons, such as to assist with recruitment and retention, says Inez Anderson, a director at Smith and Williamson. “Employers and anyone advising them have to say ‘why are you doing this’ and ‘what do you want to achieve?'” she concludes. But for anyone looking to offer benefits in an affordable way, salary sacrifice will fit the bill.
Expert view – Sacrifice under the knife?
The Government’s removal of the tax exemption around the home computing initiative (HCI) in 2006, caught much of the employee benefits industry unaware. Since then, there has been much speculation over the future for salary sacrifice perks and how long the government is likely to permit them to continue. This debate was fuelled by the withdrawal of the tax break around holiday pay schemes in last year’s pre-Budget report.
There appears to be a consensus within the benefits industry that advisers and employers should continue to take advantage of salary sacrifice schemes while these are available. Mark Carman, marketing and communications director at Motivano, for example, believes HCI schemes would have fizzled out even if the government hadn’t pulled the plug on them, as falling prices may have reduced their appeal to staff.
Jon Bryant, regional director, benefits and communication at Jardine Lloyd Thompson, also feels the Government is unlikely to withdraw salary sacrifice schemes in the near future. He believes the pensions changes such as auto-enrolment, which are due to come into effect in 2012, will instead be a watershed for salary sacrifice.
“The question is will the government allow employers to auto-enrol employees into salary sacrifice pension schemes? If the answer is no, I see that being the death knell for salary sacrifice. Up until then, I can’t see the Government doing very much about it,” he explains.
However, Martha How, head of reward at Hewitt Associates, believes advisers should proceed with caution until the contents of this year’s Budget are announced. “I would wait until the next Budget if I was looking at a brand new salary sacrifice scheme now. If advisers want to put in salary sacrifice around bikes and canteens I would do the design work and hold back. Once the Budget has come out, I think we will.
Demonstrating a return on benefits expenditure investment is now expected of most HR and reward teams. But while this can be tricky to achieve for some perks, benefits offered tax-efficiently through a salary sacrifice arrangement are a far easier sell because they result in savings for both the employee and employer.
Under the terms of salary sacrifice, employees agree to give up the right to a portion of their cash salary due under their contract of employment.
This sacrifice is typically made in return for their employer’s agreement to provide them with some form of non-cash benefit. Where benefits qualify for tax exemptions, they are free from tax and class 1A National Insurance contributions (NICs) for staff, which would both have been fully payable had they simply continued to take the portion of salary sacrificed in exchange for the perk. Employers, meanwhile, can save up to 12.8 per cent on NICs due on the portion of employees’ gross salary that has been sacrificed.
Jon Bryant, regional director, benefits and communication at Jardine Lloyd Thompson, says: “There are a core group of salary sacrifice benefits that organisations are offering, or looking to offer.”
One which has the potential to produce the greatest savings for organisations is salary sacrificing pension contributions. Employees in a defined contribution plan agree to give up a portion of their salary in return for this going directly into their pension from their employer. Some organisations also re-invest their employers’ NI savings in the form of additional contributions for staff. Martha How, head of reward at Hewitt Associates, says: “Pensions salary sacrifice has expanded hugely in the UK in the last few years. It is now a pretty mainstream offer.”
Alternatively, organisations could use their employers’ savings on NICs to shore up the deficit of their defined benefit pension scheme, says Bryant.
Along with pension contributions, childcare vouchers are one of the most popular benefits that can be offered through salary sacrifice. Childcare voucher schemes enable staff to sacrifice up to £55 a week or £243 a month from their gross salary to purchase vouchers that are accepted at any approved childcare provider. These can then be used in full or part payment at a wide range of childcare providers, including a nanny, au pair, workplace nursery, external nursery or crèche until the child is aged 15 years, or until the age of 16 years if they are disabled.
“After childcare vouchers, the take up of other salary sacrifice benefits falls away quite a lot. The reason childcare vouchers do so much better is there is much more in it for employers and employees,” says How.
She adds, however, that take-up can be relatively low as the benefit’s appeal is limited to working parents. “It’s not a disappointing take-up rate, it just reflects the workforce demographics,” she explains.
Bicycle loans, which are also known as bikes-for-work schemes, meanwhile, are a government-sponsored initiative designed to promote greener transport. Staff sacrifice a portion of their salary in return for their employer’s agreement to supply them with a bicycle and any relevant safety equipment on loan for a set hire period, which is typically set at 18 months although this is fixed at employers’ discretion. Employers that purchase the bikes outright can also reclaim the VAT on them, which they may choose to pass on to employees.
The equipment remains the property of the employer until the end of the loan period, when staff are given the opportunity to purchase it from their net salary at a fair market rate.
In order to qualify for the tax exemption, however, staff must use their bicycle for at least part of their journey between their home and work, or between workplaces. Last year, the Department for Transport re-iterated that the tax savings can only be made on bicycles which are loaned to staff by an employer, so schemes should not be marketed as an opportunity for employees to purchase discounted bikes.
Alistair Kendrick, partner at Bourne Business Consulting, says advisers should ensure organisations’ schemes adhere to the terms of the legislation so they qualify as an effective salary sacrifice. “I have heard of examples where schemes have included exercise bikes. Also, if you’re allowing people to buy bikes for children, these are clearly not qualifying bikes,” he explains.
Advisers setting up a bikes-for-work scheme should also ensure clients are covered by a group consumer credit licence that can be obtained from the Office of Fair Trading for all equipment up to the value of £1,000 (including VAT) and before any income tax is deducted. If they wish to offer staff equipment above this value, they must apply for a standard consumer credit licence.
While these benefits are offered fairly widely by employers, the specific requirements and demands of several other options means they are not typically as popular. Car parking, whereby employers typically offer staff a season ticket for a car park near their place of work paid for via salary sacrifice, is one such example. In order to qualify for the tax exemptions, schemes must meet strict criteria, which state they can only be used to pay for parking ‘at or near to’ an employee’s place of work, so it cannot be used to pay for parking at a train station near to their home, for example.
Offering bus travel through salary sacrifice, meanwhile, enables employers to provide staff with the opportunity to pay for an annual bus pass on a monthly basis through salary sacrifice. Setting up such a scheme will involve negotiations with local bus companies and HM Revenue and Customs [HMRC] in order to gain all necessary agreement.
Understanding the criteria to which some salary sacrifice perks must adhere, however, is not always clear cut. Mobile phone loans have often been viewed as something of a grey area. After some confusion, HMRC’s guidance now states that a mobile phone constitutes apparatus that is designed, or adapted for, the primary purpose of transmitting and receiving spoken messages, and which is used in connection with a public electronics communications service. As personal digital assistants (PDAs) and Blackberrys now include a number of additional functions that mean they have in more in common with computer equipment, they are not eligible for the tax break.
To comply with tax regulations, employees can only take up one mobile phone, which must be owned by the employer and then loaned to the employee for an agreed period, typically set at 12 months, but which can be extended to 18 months.
One of the newer salary sacrifice arrangements now offered by employers is meals in on-site canteens. “We’re seeing a lot more restaurant schemes going in now,” says How.
Tax savings are made when employees sacrifice a portion of their gross salary to spend on food in on-site restaurants. Most organisations that have implemented such arrangements have issued staff with a pre-paid card to use as this is often considered the easiest method of managing the cash that has been sacrificed and tracking where payments are made. Schemes will be examined by local tax offices on a case-by-case basis.
Towards the end of last year, however, HMRC appeared to be clamping down on such schemes after sending out letters to employers offering this type of salary sacrifice, warning them their scheme may not be effective because employees had retained too much control over how the tax-free money was spent.
A spokesperson for HMRC said: “Generally speaking, the employee must have given up their entitlement to receive the amount of cash salary sacrificed before they are entitled to receive it for the arrangement to be effective to tax/NICs purposes. HMRC has seen a number of cases involving arrangements that purport to combine salary sacrifice arrangements that are effective for tax and NICs purposes with the long-standing tax exemption for subsidised meals. HMRC does not accept that the tax exemption is necessarily applicable in these cases.”
How adds HMRC is increasingly likely to challenge salary sacrifice arrangements if it views these as a form of tax avoidance. “There is increasing HMRC pressure around full and proper salary sacrifice construction. Advisers need a little bit of caution.”
If salary sacrifice arrangements are correctly structured, the savings can be such that you would be forgiven for thinking all employers would be rushing to implement them. But many organisations have not yet done so. Mark Carman, marketing and communications director at Motivano, says: “If they can do it, we say ‘if you have the opportunity to make money, you should do it. But a lot of employers think there is a lot of work involved.”
Advisers should bear in mind, however, that salary sacrifice arrangements are not suitable for every organisation. Employees on, or near to, the national minimum wage, for example, cannot sacrifice their salary so their net pay falls below the minimum level, meaning they are unable to take advantage of salary sacrifice perks. Some employers, therefore, may choose not to implement such schemes if not all staff can utilise them, and in some cases, reduction in pay can have an adverse effect on state second pension.
Other employers, however, may simply be unaware of the options that are available or the possible savings. Where this is an organisation’s main reason for not introducing salary sacrifice, this can present an opportunity for advisers and providers to sell in such a scheme.
In addition, the time needed to implement a scheme may prove to be a problem for some employers. “A lot of reward professionals are so overworked, they don’t have the time to set salary sacrifice up,” says Bryant.
Advisers should also bear in mind that employers will only maximise their chances of achieving the best possible savings on salary sacrifice if the benefits obtain a good level of take-up. Understanding a client’s workforce and its requirements, therefore, is vital before implementing a scheme. “The important thing is to start with what clients’ employees want from a scheme. You can waste time setting up a salary sacrifice scheme that has limited interest. You have to really work with a client to understand what is available and what employees might be interested in,” says Kendrick.
Regardless of the savings that are up for grabs, employers should be sure that they are introducing schemes for the right reasons, such as to assist with recruitment and retention, says Inez Anderson, a director at Smith and Williamson. “Employers and anyone advising them have to say ‘why are you doing this’ and ‘what do you want to achieve?'” she concludes. But for anyone looking to offer benefits in an affordable way, salary sacrifice will fit the bill.
Expert view – Sacrifice under the knife?
The Government’s removal of the tax exemption around the home computing initiative (HCI) in 2006, caught much of the employee benefits industry unaware. Since then, there has been much speculation over the future for salary sacrifice perks and how long the government is likely to permit them to continue. This debate was fuelled by the withdrawal of the tax break around holiday pay schemes in last year’s pre-Budget report.
There appears to be a consensus within the benefits industry that advisers and employers should continue to take advantage of salary sacrifice schemes while these are available. Mark Carman, marketing and communications director at Motivano, for example, believes HCI schemes would have fizzled out even if the government hadn’t pulled the plug on them, as falling prices may have reduced their appeal to staff.
Jon Bryant, regional director, benefits and communication at Jardine Lloyd Thompson, also feels the Government is unlikely to withdraw salary sacrifice schemes in the near future. He believes the pensions changes such as auto-enrolment, which are due to come into effect in 2012, will instead be a watershed for salary sacrifice.
“The question is will the government allow employers to auto-enrol employees into salary sacrifice pension schemes? If the answer is no, I see that being the death knell for salary sacrifice. Up until then, I can’t see the Government doing very much about it,” he explains.
However, Martha How, head of reward at Hewitt Associates, believes advisers should proceed with caution until the contents of this year’s Budget are announced. “I would wait until the next Budget if I was looking at a brand new salary sacrifice scheme now. If advisers want to put in salary sacrifice around bikes and canteens I would do the design work and hold back. Once the Budget has come out, I think we will.
