15th September 2021

What is the background?

A salary sacrifice is an agreement between an employee and their employer, where the employee agrees to reduce a proportion of their gross pay in return for a benefit provided by their employer. Depending on the nature of the benefit provided in exchange for the salary reduction the employee may potentially pay tax on the benefit they receive in place of the salary, or, most often will receive either tax and/or National Insurance (NI) savings as a result of the sacrifice. The most popular (and most tax/NI efficient) benefits provided via salary sacrifice include pension contributions, company cars, cycle to work and the purchase/sale of annual leave.

With the proposals to increase the rate of NI for both employees and employers from April 2022, the use of salary sacrifice to provide some of the more popular benefits will increase the potential savings for both employees and employers.

For example, an employer providing 100 employees, paid the national average salary, with additional pension contributions via salary sacrifice could save over £20,000 per year.

Although there is expected to be an increase in the interest in salary sacrifice opportunities from employers, care also needs to be taken to ensure that the rules for a successful salary sacrifice are adhered to, and to ensure that any benefits provided do not fall foul of any anti avoidance legislation. In 2017, new rules with the “catchy” title Optional Remuneration Arrangements (OpRA) were introduced, severely curtailing the efficiency of many items provided through a salary sacrifice agreement, although some opportunities still exist. 


What is the issue?

Significant savings are still available for employer and employees for some benefits including pension contributions, cycle to work and Ultra Low Emission Vehicles. Employers also need to be aware of the potentially significant tax and NI exposure and reputational risks that could arise if the arrangement is not set up correctly for tax, NI and National Minimum Wage purposes.

For employers who may have already set up salary sacrifice agreements up a number of years ago, or who may be considering setting up new agreements, care needs to be taken to review the potential risks of non-compliance. This should be done either before they are introduced, or on an annual basis to make sure there have been no changes to legislation or guidance which could affect their agreements.


What do employers need to consider?

It is likely that these type of agreements not covered by the OpRA rules will become more attractive to both employers and employees. As an example, a pension salary sacrifice arrangement for an employer with employee contributions of, say, £100,000 per tax year could save around £13,250 employees’ NI and £15,050 employers’ NI.

However, there are strict conditions for a successful salary sacrifice arrangement to work and there are three main potential danger areas to consider when looking to meet those conditions:

•    Documentation
•    The timing of the sacrifice; and
•    Payroll operation.

If, for example, a mistake is made on the payroll for an employer with £100,000 of employee pension contributions then the tax and NI cost to the employer could be between £45,000 and £55,000 per tax year.

In addition, as the OpRA rules are relatively complex (take a look at HMRC’s P11D Working Sheet 2b for company cars and you will see what we mean) employers need to consider the rules carefully in connection with the provision of any benefit to employees. Under the rules, employers are required to identify any benefit which has either been provided via salary sacrifice, or where there is an option to receive something else, and then decide if the rules apply. If they do apply then two calculations need to be undertaken to work out the correct taxable value based on the higher of the benefit in kind value and the amount sacrificed/the cash allowance not taken.

As there are strict reporting requirements for these benefits, if employers make any errors, then the result could be additional tax and NI liabilities and potentially penalties.


How can UNW help?

Our employment tax specialists have expertise in both implementing and reviewing both salary sacrifice arrangements and also the potential impact of the OpRA rules, we can offer the following assistance:

  1. Helping you to implement any approved salary sacrifice agreements in a tax and NI compliant way to help utilise any savings;
  2. Reviewing your payroll and benefits to identify those benefits which are more efficient and also those that may fall within the OpRA rules but may still be attractive to employees;
  3. Reviewing your current salary sacrifice agreements and identify any potential issues; and
  4. Providing comments and improvements to strengthen any current agreements.

If you would like more information about this, or any other employment tax related matters, please do not hesitate to get in touch:

Lee Muter
Employment Taxes Partner
E: leemuter@unw.co.uk
T: 07810 852 362

Paul Tucker
Employment Taxes Senior Manager
E: paultucker@unw.co.uk
T: 07392 870 199

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