Salary Sacrifice and Optional Remuneration Arrangements

Salary Sacrifice arrangements are contractual agreements between an employer and employee whereby the employee agrees to a reduction in their pay in return for a non-cash benefit such as childcare vouchers or an improved pension contribution. 

These types of arrangements must apply for a limited period (normally a year). 

There are two key elements to a successful salary sacrifice arrangement:

• the entitlement to future remuneration must be given up before it is treated as received for tax or NICs purposes, and
• the true construction of the revised contractual arrangement between employer and employee must be that the employee is entitled to lower cash remuneration and a benefit

The main attraction for these arrangements arises from the fact that there are savings to be had for both the employee and the employer. 

The employee benefits from paying less Income Tax (PAYE), and both the employee and employer enjoy reduced National Insurance contributions. In addition to this, if an employee is paying Student Loan contributions, the Salary Sacrifice arrangement will also result in a lower payment for these.

2017 changes

Since April 2017, the taxation of certain benefits changed due to the introduction of the Optional Remuneration Agreements (OpRA) legislation. 

Essentially, this legislation was designed to take away the tax savings that were previously enjoyed for many benefits but still applying the National Insurance savings as before.  

Not all arrangements were affected by this change and non-cash benefits such as, but not limited to, the Cycle to Work scheme, Childcare Vouchers (provided membership started on or before 4 October 2018) and pension contributions and advice are able to operate as before.

The OpRA provisions for other benefit types works by considering the amount of salary sacrificed (or to be foregone) versus the cash equivalent of the benefit. 

The higher amount is the taxable benefit reportable under OpRA. Therefore, where there is an element of choice in an employee’s package the OpRA provisions need to be considered. 

Whenever salary sacrifice arrangements are implemented, it is the employees’ choice if they want to take part or not. 

Care needs to be taken for lower paid staff to ensure they do not sacrifice salary below the national minimum wage levels.

Coronavirus and the Future

During the Coronavirus pandemic, many employers may have been unable to retain their full workforce or may have had to rethink ways to ensure that they remain attractive to current and future employees. 

With the UK now beginning the process of unlocking the economy, many employers are looking at ways to reward and benefit their staff. 

Salary Sacrifice arrangements can be a great way to accomplish this and to bolster any existing rewards and benefit packages currently on offer.

Pension schemes

When it comes to using Salary Sacrifice as a means of contributing to a pension scheme, the result can be that the pension pot increases in the same way that it would have under the normal rules, but with the employee receiving a higher net payment each pay period due to the reduced PAYE and National Insurance deductions. 

Alternatively, many employers take the decision to add their National Insurance savings (13.8% of the sacrificed amount), or a proportion of these, to the pension pot. This can result in an increased pension build up for the employee at no further cost to the employer.

Annual leave

Another Salary Sacrifice arrangement commonly utilised by employers is the ability for an employee to purchase (or sell) additional annual leave. 

This can be an excellent method for employees to purchase some additional annual leave to assist during periods such as school holidays where they may otherwise need to spend additional funds on childcare if they had to work. 

As part of a rewards and benefits package, this can assist employers to attract and retain members of staff.

Contact us for advice and further information

If you are considering salary sacrifice type arrangements or looking at re-designing your benefit offering to your employees, please contact a member of the Employer Solutions team. 

For more information on employer issues check out our Employer Solutions Knowledge Hub.