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When is a salary sacrifice not valid

Apologies if this is a repeat question

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One of my clients for whom I do payroll pays one staff member for "so many hours at £6.50/hr".  I alerted the client to new min wage rise and the need to increase the salary but was advised that his was only what the contract says.  The reality is that the wage rate would be higher (£9, £15 whatever) but it is lower because they get perks.

On further questionning one of the perks is the provision of rent-free occupation of the cottage.  I should add the two employees, Mr and Mrs, are gardeners, in-house cooks, domestic help. At the meeting all I could think of was that PAYE is being avoided by them having a lower salary AND HMRC would expect Mr and Mrs to pay the rent to my client the rich old lady.

But is that the exact point of a salary sacrifice. (light bulb moment!!). My client said this was all drafted and discussed by an employment lawyer. But I wonder if they have sufficient skill of PAYE and benefits? Or I am being the thicky one and not realising it's a clear salary sacrifice.

I have read various EIM pages. The need for staff to "opt back" into the higher salary equivalent etc. Just wondering on readers thoughts on this please? 

All I know is that at present the employment contract/summary which I have seen shows an hourly rate below NMW. Any issues or things to offer to client?

Thank you.

Replies (19)

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By Democratus
13th May 2016 10:51

Great question - i hope someone knows the answer.

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By SteLacca
13th May 2016 10:56

Salary sacrifice explicitly cannot reduce the hourly rate below NMW, so still illegal.

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Hallerud at Easter
By DJKL
13th May 2016 10:59

Re the accommodation, can it be considered necessary?

https://www.gov.uk/expenses-and-benefits-accommodation/whats-exempt

If it’s necessary or usually provided for the job

Accommodation at the place of work is exempt if:
your employees can’t do their work properly without it, eg agricultural workers living on farms
an employer is usually expected to provide accommodation for people doing that type of work (eg a manager living above a pub, or a vicar looking after a parish)

Does not really help re the minimum wage question but may help re the "paye being avoided" question.

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Hallerud at Easter
By DJKL
13th May 2016 11:01

https://www.gov.uk/national-minimum-wage-accommodation

1. Accommodation rates

Accommodation provided by an employer can be taken into account when calculating the National Minimum Wage or National Living Wage.

No other kind of company benefit (eg food, a car, childcare vouchers) count towards the minimum wage.

Accommodation offset rates

The accommodation rates are set in October each year. The current rates apply from 1 October 2015.

Year

Daily accommodation
offset rate

Weekly accommodation
offset rate

2015 (current rate) £5.35 £37.45
2014 £5.08 £35.56
2013 £4.91 £34.37
2012 £4.82 £33.74
2011 £4.73 £33.11
2010 £4.61 £32.27
2009 £4.51 £31.57

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Replying to DJKL:
By Democratus
13th May 2016 11:04

well done DJKL - does that apply to salary sacrifice though rather than accomodation allowances?

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Replying to Democratus:
Hallerud at Easter
By DJKL
13th May 2016 11:34

Afraid wrong person to ask, I just got lucky with Google.

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By Democratus
13th May 2016 11:03

https://www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye (sorry i can't do the manual html thingy - Aweb need to bring back the ability to embed links)

says "A salary sacrifice arrangement can’t reduce an employee’s cash earnings below the National Minimum Wage rates." but doesn't quote any statutory authority. I assume the EIMs you have read are unclear on this point hence the question.

Various googling around personnel and law sites seems to confirm the view that salary sacrifice schemes cannot breach the NLW minimums.

So whilst I can't conclusively confrim that you are right in your assertion i would agree with you.

As a solution perhaps the employer could reduce the salary sacrifice element of the rent to allow NLW and receive the balance back in actual cash rent - hope that makes sense.

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Replying to Democratus:
Hallerud at Easter
By DJKL
13th May 2016 11:45

Sorry, I am not following the salary sacrifice discussion.

Is it not just the case here that for minimum wage purposes the amount paid plus the notional accommodation benefit per the table (presume no charge back) are added together and the resultant becomes the figure tested re the minimum wage, as per the illustrations?

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By Democratus
13th May 2016 11:09

deleted - double post - thought my response didn't go through - but it was buried in the hidden section which you have to select to see more . Someting else for Aweb to work on.

Also turns out i can embed hyperlinks - you just type it in and the software recognises it --yeah Go me!

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Replying to Democratus:
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By HeavyMetalMike
13th May 2016 11:52

Thank you all for replies so far. I see the logic in checking £6.50 plus accom must be more than £7.50 or whatever it is.
As an aside, please, is PAYE being unlawfully avoided or is that the WHOLE point of the sal sac. Sorry, I'm too close to the numbers so being thick I guess?
Thanks

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Replying to HeavyMetalMike:
Hallerud at Easter
By DJKL
13th May 2016 12:04

Surely the question is whether the accommodation is or is not a taxable benefit, for that you need, I think, to look at how necessary its provision is re the duties of the couple?

If the elderly employer has them there in case she falls etc, in part of her house, there may be a strong argument, similar if the "housekeeper" say has early start re breakfast.

Afraid BIK never my strong suit so what is usually acceptable/case law not within my day to day role.

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By Democratus
13th May 2016 14:46

2 different things here.

If you can make the argument that the accomodation supplied can be rightfully seen as wholly and necessary for the carrying out of their employment then there is no BIK, no tax on the employee, no Ers NIC on the employer no need for a Salary Sacrifice Scheme and all is good....save for the fact that the Er could now be accused of an unlawful deduction from wages for rent not properly due....(another debate perhaps).

If not then the original point stands and the NLW obligation is being broken.

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By andyscotland
16th May 2016 11:41

There are two separate issues here. The first is whether they are breaking minimum wage law, the second is whether they are paying the correct tax.

Re minimum wage, it depends how many hours they work. If they're not being charged for the accommodation that's treated as though they are being paid an extra £5.35 a day. If they work an average of 7 hours a day, then their total pay for the day is (7 * 6.5) + 5.35 = £50.85. That's an hourly rate of £7.26 so (just) OK. If they work more than 7 hours a day then they are below NLW. The hours and rates etc are averaged over the pay period eg week/month. It's not relevant for that test whether or not they could choose to have the money instead, and it only applies to accommodation.

Then there's the question of tax. Per DJKL's link below some employer-provided accommodation is not a taxable benefit. In that case there is no taxable benefit - the taxable pay will be below NMW.

If they don't meet the criteria for tax-free accommodation then it would be taxable as a benefit in kind. Fairly sure in that case HMRC would expect the value of the benefit declared (and tax paid) as a market rent rather than the notional £5.35 a day used for the NMW test.

Either way, yes this could be considered a salary sacrifice - BUT salary sacrifice only makes sense if you sacrifice something taxable (pay) for something not taxable (accommodation that meets the exempt-from-tax criteria, pension contribution, bike to work).

If the thing you are sacrificing for is also taxable (non-exempt accommodation, lifetime supply of ice cream), then that needs to be declared as a benefit in kind and tax paid so you are just moving numbers around the payslip for no gain.

There's nothing magic about a salary sacrifice that makes things that would be taxable suddenly be tax free. Likewise there's nothing magic about a salary sacrifice (done correctly) that would allow HMRC to suddenly ask for tax to be paid on something that would otherwise be exempt.

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By ianthetaxman
16th May 2016 12:53

Interesting thread - so if you assume a 40 hour week, the accommodation element is worth just over £0.93 per hour. Add this to their hourly rate and they are being paid equivalent to £7.43 per hour at the moment - above the £6.70 NMW. That said, I wonder if the NMW/living wage increases will be at the same rate as the weekly accommodation rate?

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By Emma Braunton
17th May 2016 12:55

This might help, it includes accommodation deductions

https://www.gov.uk/minimum-wage-calculator-employers

With all the naming and shaming going on for employers paying less than minimum, I would look to put everything possible on the payslip.

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By HeavyMetalMike
17th May 2016 18:35

Thank you to all.
There is enough confusion and or confirmation of my confusion that I need to refer back to the "clever lawyer" who drafted this and advised upon it in the first place.
I shall be in touch, if anyone is interested.

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Replying to HeavyMetalMike:
By Democratus
20th May 2016 16:53

Please do - though I have had to turn all notifications off so I'll be lucky to spot it.
Grumble grumble, dang nabbed new site grumble

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By bendybod
03rd Jun 2016 12:06

If the rent-free occupation is normal for that kind of employment then the accommodation add on applies for NMW / NLW purposes. Are we talking a cottage on the rich old lady's estate or just some accommodation nearby? The latter would be far less likely to pass the accommodation test. As stated, the salary plus the accommodation rate would need to come up to the appropriate national wage.
If the rent-free occupation is not normal for that kind of employment then it is a taxable benefit.
The purpose of a salary sacrifice generally is to reduce the NI / PAYE burden but, as stated before, that only really works if the sacrificed amount is not a taxable benefit, such as a pension contribution - reduce your salary, pay less NI / PAYE and get the employer to pay the money over to the pension provider.

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Replying to bendybod:
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By andyscotland
05th Jun 2016 11:27

Sorry, that advice is incorrect. As with others in the thread, you're mixing two entirely separate issues - living wage and taxation.

There is no "normal for that kind of employment" test for national living wage purposes. Per https://www.gov.uk/national-minimum-wage-accommodation/accommodation-cha... the only test is whether the employer is directly or indirectly providing the accommodation that the employee lives in - apart from 2 specific exceptions for social housing providers and higher education institutions.

This is the case even if the accommodation is optional (though it only counts as being provided if the employee chooses to use it).

If the employee is living in accommodation provided by the employer, then the published offset rate (less any charge the employer makes including for utilities etc) can be added to the cash salary and averaged to check compliance with national living wage.

The question of tax is totally separate, and you're right there it does matter whether the accommodation would normally come with the job - per https://www.gov.uk/expenses-and-benefits-accommodation/whats-exempt.

If so then it will not be taxable and the employee's taxable pay and benefits will be (legitimately) below national living wage.

If the accommodation does not meet the tax exempt rules then the value of it (eg market rent, if given free of charge to the employee) has to be declared as a taxable benefit like any other.

This is true even if the employer is using the accommodation to make up part of the national living wage.

Take someone working 7 hours a day at £6.44 an hour, living free of charge in employer-provided accommodation worth £500 a month on the open market. The current NLW accommodation offset rate is £5.35 a day.

If they are a live-in housekeeper, their hourly wage for NLW is £6.44 + (£5.35 / 7) = just over £7.20. The accommodation is exempt so their taxable pay is £6.44 an hour.

If they are a shop assistant living in a flat down the road, the NLW calculations are the same and this is still fine. However the accommodation is not exempt, so they have to pay tax on the value of the £500 a month they're being "given" by the employer on top of the tax they pay on their £6.44 an hour paid in cash.

Both situations are perfectly legal from both an NLW and tax point of view. However clearly the latter one is no better for the employee (and a lot more hassle to administer) than getting a £500 a month pay rise and starting to pay rent.

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