Looking At The Future Of Salary Sacrifice

You might have heard the term “salary sacrifice” but not be particularly familiar with what it is or what it involves. In this article, we take a brief look at what a salary sacrifice scheme is, discuss some of the changes made to these schemes over the years, and then consider what might be the future of salary sacrifice.

The GOV.UK website defines it as follows: “A salary sacrifice arrangement is an agreement to reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit.”

Essentially, employees give up some of their salary in return for non-cash benefits in kind. For the employees their reduced pay means that they are paying lower income tax and national insurance contributions, while receiving the non-cash benefit they want. For an employer, there are savings to be had as they are paying lower national insurance contributions thanks to the reduction in the employee’s salary.

It’s important to note that a salary sacrifice arrangement cannot, by law, reduce the cash earnings below the current applicable national minimum wage rate for any employee or worker.

Salary sacrifice schemes as we know them have been around for over a couple of decades now. They quickly became very popular with both employees and employers thanks to the financial advantages for both parties and the flexibility and choice of benefits.

But in April 2017 changes were brought in that significantly reduced the range of salary sacrifice schemes that were eligible for lower tax and NI payments. It is likely that a large number of salary sacrifice schemes in operation had become unsustainable, given the amount of income tax and national insurance contributions that were no longer being received by HMRC.

Affected schemes included accommodation, health screening, school fees and phones and computers. Employers were still able to continue to offer the salary sacrifice arrangement to their employees, but the arrangement became considerably less attractive to both employers and employees as the new rules effectively resulted in many of the schemes being subject to the same amount of tax as the employee’s cash income.

Effectively the majority of the tax and national insurance advantages that had played a large role in incentivising a significant proportion of employers to offer these schemes had gone.

Salary sacrifice schemes that were already up and running before April 2017 were allowed to continue for a period after that however. So employers and employees who were already benefiting from the savings were able to continue to do so, depending on the scheme, up until 2021.

The Government did not want employers to completely stop providing certain key non-financial benefits to employees so some schemes were exempt from the changes. These included employer-supported childcare vouchers and workplace nurseries, bicycles and cycling safety equipment as well as employer pension contributions and pension advice.

Although some wondered if the changes in 2017 marked the start of the end of salary sacrifice schemes, many are still up and running and thriving today. It’s notable that many of the schemes that continue are ones that support important issues for employees, employers and society in general. Finding ways to provide affordable childcare is a priority for example, so it would be surprising if the government decided to end this scheme.

But it also seems likely that in some form or other, Cycle to Work schemes will continue to be supported through salary sacrifice arrangements. It’s well recognised that cycling is beneficial for health and is a low emission way to travel.  With the ambition growing for more people to choose greener modes of transport, it’s unlikely the government will want to reduce incentives for adopting this form of transport.

This growing concern about the impact of our travel choices on the environment also makes it very likely that the current arrangements for Ultra Low Emission Vehicles (ULEVs) will remain in place too. The salary sacrifice car scheme presents another way to encourage more people to drive electric vehicles.

However, like any scheme, there are some pros and cons:

Pros:

• Reduced Income Tax and National Insurance Contributions: The scheme allows for pre-tax salary deductions, leading to potential savings on income tax and National Insurance for employees.
• Access to New Vehicles: Offers the chance to drive a newer, possibly more eco-friendly car, which might be more expensive outside the scheme.
• Ease of Vehicle Management: Comprehensive management typically covers insurance, maintenance, and other costs, simplifying the process for employees.

Cons:

• Affects Loan Eligibility: The reduction in visible income can impact loan or mortgage applications due to lower take-home pay.
• Decreased Take-Home Pay: Participation results in a lower net salary, affecting the overall budget.
• Early Termination Risks: Leaving the employer before the scheme ends might incur costs or other challenges.

Equally, with an ongoing emphasis on financial wellbeing for the future, the current arrangements that enable employees to take up the option of salary sacrifice as part of their pension scheme can be expected to remain.

This approach can be attractive to employees as it helps to make their pension saving more tax efficient and could also result in an increase in net pay. The employee agrees to a reduction in salary by an amount equal to their pension contributions. The difference in salary is then paid as an employer contribution on top of the rest of the contribution the employer would already be making.

The salary reduction means lower national insurance contributions for both parties which can mean a higher take home pay for the employee. Some employers choose to pay some, or all, of their NIC savings into the employee’s pot too, although they are under no obligation to do so.

In such an unpredictable world, it can be challenging to pin down precisely what the future of salary sacrifice will look like, but the current direction of travel seems to be one that will continue for some time yet. We hope this article has helped you understand more about what salary sacrifice is along with some of the background that helps to explain where we are now.

As payroll experts, CPS has been working with its clients for many years helping them to manage their salary sacrifice schemes. If you would like to learn more about our range of payroll services, including a fully outsourced payroll option, then please do get in contact with us.