Editor's message: Salary-sacrifice schemes - whereby employees give up some of their salary in return for non-cash benefits in kind - are popular among both employees and employers. As an employer, you can obtain monetary savings as you pay lower national insurance contributions on the reduced employee wages - and these savings can be used to enhance benefits provision elsewhere in the business. Savings for employees come from paying lower income tax and national insurance contributions due to their reduced pay. Such schemes also give employees flexibility of choice on the benefits they receive and how their individual remuneration package is shaped.
However, the range of salary-sacrifice benefits that attract tax and national insurance savings has changed. From April 2017 (or April 2018 if the scheme was already in place in April 2017) tax benefits are available only on pension contributions, ultra-low-emission vehicles, cycle-to-work schemes and employer-supported childcare. Employers can still offer other benefits on a salary-sacrifice basis, but they will not be able to take advantage of the tax exemptions - thereby making the arrangements much less attractive to both parties.
Previously in salary sacrifice schemes where the arrangements reduced a worker’s pay to below the national minimum wage rates, employers faced financial penalties. However, on 11 February 2020 the Government updated its policy on national minimum wage law enforcement to include a new direction stating that employers offering salary sacrifice and deductions schemes will no longer be subject to such financial penalties if the scheme brings payment below the national minimum wage rate, provided that certain conditions are met.
Sarah Byrne, HR practice editor
Updated to reflect the increase to the statutory maternity pay rate from 5 April 2020.
Updated to reflect the increase to the national minimum wage rates, effective from 1 April 2020.
Updated to include a reference to the Government's response to the consultation.
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Definition from the XpertHR glossary.
HR and legal information and guidance relating to salary-sacrifice schemes.