As the name suggests, salary sacrifice involves your employees giving up part of their salary. This type of arrangement can be put in place to interact with the payment of contributions to a pension scheme.
In a typical case where your employees are active members of an occupational pension scheme, like BlueSky, an amount equal to the pension contributions can be deducted from your employees’ basic pay, reducing the tax and NI deductions. In exchange you, the employer, would pay this amount to the pension arrangement in addition to your standard employer contributions.
Benefit of salary sacrifice for employees
The amount of pension contributions made by your employees would be deducted from their basic pay to create a reference salary from which tax and NI contributions will be deducted increasing net pay.
Benefit of salary sacrifice for employers
The benefit is in the saving you, the employer, achieves in National Insurance Contributions.
Will this affect other benefits?
It could do. If salary sacrifice pushes an employee’s salary below the Lower Earnings Limit for the purpose of paying NICs then certain state benefits could be affected. These include the basic state pension, statutory sick pay, statutory maternity pay and tax credits.
Do you need the employees’ agreement?
Yes. However, your employees are unlikely to complain if they gain overall from salary sacrifice.
What does HMRC have to say?
Quite a lot, and it’s all fairly helpful and positive although HMRC is the main loser from salary sacrifice because of the reduction in NICs.
HMRC permits salary sacrifice and insists that the agreement to sacrifice an amount of salary is made before it is treated as received for tax and NIC purposes. HMRC has guidance which also explains in some detail what impact salary sacrifice might have on other benefits.
Salary sacrifice arrangements do not have to be approved by or notified to HMRC but it is open to employers to consult HMRC on the correct tax treatment of the arrangements. However, the fact that HMRC gives this guidance is no guarantee that it might not revoke salary sacrifice at a later date.
BlueSky can help you through the process and start to make cost savings in light of your added responsibilities throughout the ‘auto enrolment’.
As an employer, you must enrol all of your eligible employees into a qualifying workplace pension scheme. Each employer will have its own ‘staging date’ dependent upon the size and you have the responsibility to ‘automatically enrol certain employees; this is not the responsibility of the chosen pension scheme.
Data management is essential to the success of this process and BlueSky can help to ensure you meet all of your legislative responsibilities.
BlueSky have developed a complete RAE (Real time Auto Enrolment) system which is fully compliant and forms part of its ‘one system for all’ administrative tool. This package sits alongside the BlueSky Pension Scheme and is costed in line with the number of employees working for each employer.
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