Salary Sacrifice

Salary Sacrifice

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During a review of our pension arrangements, our advisor has put forward the use of a salary sacrifice scheme to save national insurance contributions. I however have reservations. We operate in a competitive market for staff where headlne salary seems to carry great weight. Whilst our advisor has suggested the amount sacrificed could be shown as a notional salary on the payslip, my fear is that the amount sacrificed could over time become negated by higher salary increases so that costs actually increase. Have any members experienced such a situation occurring?
Chris Humphrey

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By aburt01
16th Jun 2008 17:49

Flexible benefits...
is a great topic.

There can be very few HR/Payroll managers left working for FTSE quoted companies who have not by now been tasked with implementing a flex.bens. package for their staff. "Flexible", because the employee has choice, and is a volunteer for change in treatment, and remains in control of how the pension benefit is to be treated.

The concept of reducing NI, by employees agreeing for the employer to pay a pension contribution on their behalf, whilst accepting an equivalent reduction in taxable/nic-able gross pay on their payslip is not new. Rare? Perhaps; there aren't many non-taxable but NIC-able items like pension for which HMRC will agree this treatment. I suspect the intro. of childcare vouchers increased the acceptance and popularity of such schemes. (drop in NIC-able pay normally reduces any subsequent Stat.Maternity payments, hence not suitable for everyone)

But given the software products on large payroll systems promote these features more and more, there is no excuse for not implementing them.

And when implementing, the major corps. also look to include flex. options on staff work-life balance, (staff "buy" a few more days holiday?) some even take the opportunity to dispense with a chunk of P11D admin by "PAYE payrolling" some of their benefits in kind, the benefits with a (predictable) fixed value, medical insurance etc... and quite easy to do.

Saves money, and can add some "flexible" fun as well.

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By simonwwhitt
16th Jun 2008 17:23

Maternity pay
One slight hiccup that we encountered is that pension contributions have to be paid throughout the initial period of maternity leave (as they are "benefits" not remuneration). However if your company pays only the Statutory Maternity Pay then you will not be able to recover the salary sacrifice part of the pension contributions and consequently you will end up having to pay the employees element of pension contributions in addition to the employers elelment.

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By AnonymousUser
16th Jun 2008 17:12

Give them a menu
If the headline rate is that important why not give the staff a salary package that is based on a main salary rate.

Once the rate has been set then the staff can chose from a menu of benefits that they might wish to receive for an appropriate salary sacrifice.

Such benefits may include: medical/dental insurance, company car, pension contibutions, beneical loan rates etc.

For each item chosen the "gross" pay on the payslip would reduce and the appropriate benefit be given.

Annual or other salary reviews would be based on the total package value so that there is no erosion of differentials.

Each year the employees would have a choice of which benefits to take and this could change year on year as circumstances change. However to overall package would still be one which the staff could refer to to compare themselves with the marketplace.

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By User deleted
11th Jun 2008 14:29

Notional salary
In our case pension contributions., pay rises and hourly rate etc are calculated on the notional salary, which is before the sacrifice.

The pay review states Notional Salary, Salary sacrifice and Actual Salary. The notional salary is that which is increased by RPI.
I believe it is a true salary sacrifice as the employee is no longer entitled to the full salary, has sacrificed it in advance of earning it etc etc.

Just because they sacrifice a portion of their salary, does it mean they should be paid a lower hourly rate for overtime or are you saying that someone on £10 an hour gross salary should get £8 plus £2 childcare voucher instead of £10?? Surely you don't just give them £8?

By the way our payslips show salary as 'actual' and then an addition and a deduction for the childcare voucher amount.

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By Euan MacLennan
11th Jun 2008 13:49

Yes, but
When an employee does a salary sacrifice - say, for the maximum tax-free childcare benefit of £2,916 a year - do you actually reduce the annual salary by £2,916 and along with it:

- the hourly rate (by £1.50 for a 37.5 hour week) on which any overtime pay is based, and
- the base for the annual % pay increase, which would mean smaller pay increases in future, regardless of whether the benefit is increased,

or do you put through a separate pre-tax & NIC deduction for the sacrifice each month, leaving the hourly rate and base salary unchanged? If the latter, is it a real salary sacrifice?

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By User deleted
11th Jun 2008 13:34

I had no problems with it
When I was at EY, I was part of a salary sacrifice scheme. It saved me money, it saved EY money and I had a bigger pension payment each month as EY also paid half of their NI savings in to the pension as well as their er's contributions.

Win win as far as I was concerned.

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By Dave Collier
11th Jun 2008 12:38

No problem
I don't see why this should be. All our salaries are advertised at the full rate. Only when new staff join may they take advantage of salary sacrifice schemes (pension, childcare & cycle-to-work) and this gives them clear tax savings. Staff are fully aware of the advantages of salary sacrifice and see it as a great benefit. It keeps them happy and also saves us 12.8% employers national insurance on the amount sacrificed by staff (we set up and administer the schemes ourselves). Winners all round.

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