Understanding Salary Sacrifice

16 October 2017

Employer representatives sitting on the Statutory Payments Consultation Group have been pleading with the various government agencies involved in Statutory Payments to make clearer what employers have to do to comply with Maternity Rights, especially in light of the extension of rights to non-cash benefits.

On 20th May 2008 Her Majesty’s Revenue & Customs (HMRC) published a comprehensive guide to “Statutory Maternity Pay – Salary Sacrifice and non-cash benefit" on their website. Now archived, you can locate the contents here. It was a joint effort between HMRC, the Department for Business Enterprise and Regulatory Reform (BERR) and the Department for Works and Pensions (DWP), along with the assistance from the employer and software representatives of the Statutory Payments Consultation Group.

Following a joint survey undertaken by Payroll Alliance and the Institute of Payroll Professionals on the impacts of the new maternity rights extending benefit in kind entitlement to 52 weeks, it was obvious to the employer representatives and the government that a wide and varied application of salary sacrifice interpretations was being undertaken and there was a misunderstanding regarding non-cash benefit provision (whether salary sacrifice or just plain employee benefits).

Salary Sacrifice

Although not described specifically in legislation, salary sacrifice is a legally binding change in the contractual arrangements between employee and employer. Generally, the employment contract is amended to reduce the employee’s entitlement to cash pay on the basis that the employee receives an alternate non-cash benefit instead. If no contractual change has actually been made, then the salary sacrifice fails and the benefit in kind is treated as cash pay. Equally, if the employee (or employer) can opt in and out of the arrangement at will, then this fails under a precedent set in the Heaton v Bell case where a benefit could be given up at any time to receive increased pay – as a consequence it was declared that the benefit was a chargeable emolument and therefore subject to PAYE and NICs.

The reduction in cash pay through a successful salary sacrifice results in reduced PAYE and NICs. Then the employee and employer are left with the tax and NICs position on the giving of a free non-cash benefit in kind. Often, the benefit may be free of both tax and NICs, and many others are free of NICs.

Although salary sacrifice may be represented in any way, shape or form on the payslip, it is the contractual arrangement between the employee and employer that positions the tax and NIC implications.

Questions and Answers

Q: Are employer pensions cash benefits or non-cash benefits?

A: HMRC, DWP and BERR concur that employer contributions are not non-cash benefits in kind.

Q: If employer pension contributions are treated as cash, does that mean they are not required to continue during maternity leave?

A: No, pensions fall under alternate legislation, so employees are entitled to continued pension rights. They must be continued for 26 weeks in all cases (under Maternity and Parental Leave Regulations) and extended for any additional weeks where the employee is in receipt of any maternity pay (Social Security Act 1989). They are employer pension contributions!

Q: If an employer normally contributed 5% and the employee 3% into a money purchase pension scheme and the employer promotes a salary sacrifice arrangement to reduce NICs liabilities where the 3% employee contributions are converted to an additional 3% employer contribution (making 8% in total), what employer percentage must be applied during maternity leave?

A: As a salary sacrifice arrangement is a legally binding contractual change, the employer is required to continue to contribute 8% as if the employee were in receipt of full pay.

Q: Can the employer revert back to a 5% contribution and the employee only contributing 3% of their maternity pay?

A: No, this would breach discrimination law. The employer must continue paying 8% (as they would if the employee were not on maternity leave). As the amount cannot now be recovered from the employee, who funds this additional contribution amount? The answer is simple, the employer must fund the contractual employer pension contribution (because that is what it is).

Q: If an employer withdraws a benefit due to no non-maternity pay being available to operate the sacrifice reduction during maternity leave, does this make the prior salary sacrifice ineffective?

A: I would suggest no, but the employer that withdraws such benefits is breaching discrimination law and the employee entitled to make a legal claim which could prove extremely expensive for the employer.

The guidance is essential reading and I would suggest 100% accurate. Does it outline all elements of non-cash benefits? No, but then its not intended to – but it does lay out the employers legal obligations.

Pension contributions

Employers need not continue to make employers’ occupational pension contributions during unpaid Additional Maternity Leave (AML), or to count unpaid AML as reckonable service for the purposes of occupational pension contributions. (However, the law already requires employers to continue to provide occupational pension contributions during any period of paid maternity absence and this requirement is unaffected by the changes described here. The law also requires that employers continue pension contributions during Ordinary Maternity Leave (OML), regardless of whether the employee is in receipt of maternity pay. 

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