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Technical View

Salary Sacrifice or Win-Win?

Following the 2016 Autumn Statement where there were restrictions placed on permissible arrangements, you could be forgiven for thinking that Salary Sacrifice is a thing of the past. 


However, the changes do not affect all types of salary sacrifice.  For example - pension savings made via salary sacrifice are still very much a viable option. 
In this month’s Technical View we take a look at the inner workings of pension salary sacrifice and discuss why ‘giving up’ part of an individual’s salary may not be quite as sacrificial as it may seem.

The concept is quite simple.  When an individual agrees to the setup of a salary sacrifice pension arrangement with their employer, the terms of their employment contract are changed in order to reduce their entitlement to cash salary in exchange for a benefit in kind.  Instead of receiving that portion of their salary which would be subject to Income Tax and National Insurance (NI), they receive a non-cash benefit which will normally be exempt from Income Tax and NIs.

Win-win for employer and employee

This can represent a saving for both the employee and their employer as neither will have to pay NI on the sacrificed amount.  There is also an option (subject to the employer’s discretion) to pass this saving onto the employee via an increased pension contribution of some, or all, of the employer’s NI saving.   It is possible for other benefits, such as lump sum death benefits to be based on a reference salary, before any cash salary is exchanged. 

All pension contributions made via salary sacrifice are employer contributions and are assessed against an individual’s pension annual allowance.  Note that salary sacrifice cannot be used as an anti-avoidance measure to mitigate any tapered annual allowance issues.

For employers wanting to increase employee engagement in the staff pension scheme, using salary sacrifice for pension contributions and explaining the added benefits of such an arrangement could help to boost opt-in to the scheme.  Potentially, it also gives a saving for employers who may be struggling with the added costs of auto enrolment pensions. 

When every penny counts..

For employees who may be putting off saving into a pension because of a lifestyle change, such as marriage or a house purchase, salary sacrifice can be a less painful way of putting a little aside every month to ensure that they’re not compromising one for the other.  By sacrificing salary in return for an employer pension contribution the saving on income tax and NI plus possible passing on of NI savings from their employer go a long way to making up for any ‘sacrifice’. 
There is also the option for clauses to be written into the salary sacrifice arrangement allowing the employee to opt out if they have experienced a lifestyle change.  The specific changes included would normally be specified in the arrangement.

As with anything, salary sacrifice in return for a benefit in kind such as employer pension contributions will not be for everyone and there are certain points to bear in mind, such as potential effects on entitlement to maternity or paternity pay, and for those applying for a mortgage may be assessed on their salary after the exchange.  There is also a requirement that no salary sacrifice arrangement can lower an individual’s cash salary below the national minimum wage.

With the NI savings this may also be a more cost-efficient way for an employer to operate an auto-enrolment scheme, particularly if they are a smaller employer. 

There are certain requirements that need to be met in order for HMRC to consider a salary sacrifice arrangement to be successful.  For more information on these requirements you may find it useful to have a look at the salary sacrifice section on HMRC website.  HMRC do not view these arrangements as tax avoidance, far from it.  The HMRC guidance makes it clear how these arrangements can work successfully.

If a salary sacrifice arrangement is unsuccessful or becomes unsuccessful / fails to continue to qualify, both employee and employer will remain liable for tax and/or NICs on the sacrificed cash amount.

When looking at the big picture in terms of retirement planning or employee benefits packages, it’s difficult to see why an employer wouldn’t want to encourage such an arrangement.  Without question, it does have its disadvantages for some; but more often than not, it can be a win-win situation.

A PDF version of this article is available.

This note is to be used by Financial Advisers only. It is not intended for onward transmission to a private customer and should not be relied upon by any other person. Sanlam accepts no liability for any action taken or not taken by an individual or firm as a result of the contents of this material. The tax treatments and information contained in this document are based on current tax law and HMRC practice as at May 2017 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. This document is for information purposes only and should not be treated as advice and independent taxation advice should always be sought.

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