Furlough advice: Debunking salary sacrifice and benefits in kind myths
This article was originally published in April 2020 and was updated in September 2020 to reflect new Government advice regarding payrolling benefits in kind.
Many UK businesses furloughed their employees to keep paying workers while business was temporarily closed under The Coronavirus Job Retention Scheme (CJRS). The government’s measure helped thousands of businesses to stay afloat, but one issue that continues to perplex people is in relation to employee benefits and salary sacrifice arrangements, such as childcare vouchers and cycle-to-work schemes.
Payrolling benefits in kind
The good news is, the government are making it easier to pay employees benefits in kind. To help employers, businesses and individuals, almost all benefits in kind can now be payrolled to save you time, which means no more P11D forms. If you want to payroll benefits during the 2021-22 tax year, you can register right up to 5 April 2021.
The P11D brings an uncertainty bounce shock, especially for new starters or for one-off benefits reported on form P11D now. Due to its annual reporting nature, employees can be hit with a three-year liability from the tax on benefits from the last year and forward taxation for the current. However, this can be prevented by payrolling benefits in kind.
So why not consider payrolling from April 2021. Registration needs to happen by the latest 5th April else you are too late and will end up waiting another year. Good payroll solutions have capability present so you can save both yourself and your employees any reporting hassles. You will need to consider adding pay elements to enable the tax calculation, generally there is no NIC in payroll, although there may be Class 1A NIC liabilities on the employer that need to be accounted on the single form P11Db as an adjustment value.
Understanding benefits in kind
It's worth noting that benefits provided by employers have different tax and National Insurance implications than an employee receiving cash remuneration.
Childcare vouchers given to employees are tax and National Insurance free up to certain limits determined by the annual Basic Earnings Assessment (BEA).
Items such as bikes provided through an employer scheme don’t create a tax or National Insurance charge on the employee. Employer pension contributions (within certain limits) also have no liability to tax or National Insurance Contributions.
Medical and Dental benefits are subject to P11D, although they can be payrolled for the tax liability, they are not subject to Class 1 NIC, but an employer Class 1A.
Company cars have no employee Class 1 liability, but they do have benefit tax and employer Class 1A.
The question is, if an employee buys these benefit items, do they have similar tax and National Insurance Contribution reliefs? The answer is no they don’t. Employees cannot buy any of them from their declared earnings and receive any tax and NI reliefs. The purchase would be after the deduction of tax and NICs.
Employee deduction with tax/National Insurance relief
The only employee deductions that have tax relief are actual employee pension contributions, charitable giving, and additionally with regards to National Insurance relief, Share Incentive Plans.
So, what about salary sacrifice, aren’t the employees buying benefits? Simply no, they are buying nothing.
Salary sacrifice is about a contractual construction which determines benefits which legally cost the employee zero. Salary sacrifice is not a pay deduction, it is agreement of a remuneration pay cut or exchange to receive a free benefit instead of cash pay. The contractual construction is key. The payroll representation is not key, the contract is. These constructions are generally referred to as salary sacrifice, Flexible Benefits or Smart schemes and they involve employment law and may interact with tax, social insurance and pension law implications. Employers and employees often do not understand them or the legal and tax implications. They can impact state benefit, maternity and pension amounts.
Often payroll operates a notional pay value. This is not earnings or pay, or it would be subject to tax and National Insurance Contributions. Some employers then operate reductions relating to the employer provided benefits. The employee is not buying these benefits as they never earned the money. The residual amount is the actual declared earnings. And the benefits selected are the employer’s responsibility and now a contractual right. These benefits may be due to continue during periods of zero pay and certainly during maternity leave with employment law (non-cash benefits – full duration of maternity leave) and social security law (cash benefit employer pension contribution during any paid maternity leave).
Example of furlough and salary sacrifice
The example below has been created to help you calculate furlough and salary sacrifice.
An employee has a monthly notional pay of £2,800. They have a 5% salary sacrifice pension scheme applied to that notional pay, £100 childcare vouchers and £25 cycle to work salary sacrifice arrangements:
Notional Pay £2,800
Smart pension -£140 (5% of £2,800)
Childcare -£100 fixed
Cycle2Work -£25 fixed
Cash Pay £2,535 which is subject to tax and NICS (this is the reference pay for furlough).
The CJRC reclaim is 80% = £2,028 plus Ers NIC and Pension banded 3%
Unless the contract is changed, the employee remains entitled to both the £100 childcare and £25 cycle benefit funded by the employer. And the equivalent of 5% smart pension contribution.
To calculate the uplift for the employer pension contribution in relation to the sacrifice:
Furlough reference pay plus fixed salary sacrifice values divided by (100-% pension sacrifice) multiplied by 100 to determine the pensionable pay for the basis of the employer contributions.
(£2,028 + £100 + £25) / 95 * 100 = £2,266.32 @5% = £113.32 additional employer pension contribution relating to furlough. The same £2,266.32 would also be the basis of the non-salary sacrifice employer pension contribution.
The final verdict
The Coronavirus Job Retention Scheme covers cash pay and the employer remains responsible for the provision of benefits under the contract of employment. Therefore, unless the employee’s contract is changed, the employee remains entitled to any salary sacrifice or benefit in kind from the employer.
Can an employer cancel a salary sacrifice arrangement and increase the Furlough reference pay? The answer is no. Salary sacrifice arrangements are never retrospective and as the 19th March has already passed and the taxable income declared, the reference pay for furlough should not be changed.
As always, please consider checking the official government website for updates on the CJRS and their official statement on benefits in kind and Salary Sacrifice.