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How to make your salary sacrifice arrangements effective?
3 June 15 | By: Jas Jhooty
Salary sacrifice arrangements have become increasingly common in recent years. They offer clear advantages for employers and some benefit for employees too. However great care needs to be taken in setting them up.
What is a salary sacrifice?
This involves employees giving up part of their salary, but in return for another benefit. If the employee swaps taxable cash salary for a tax-free benefit, the employee will save the tax and NIC associated with the salary and the employer will make secondary Class 1 NIC savings of 13.8% on the sacrificed salary.
No salary reversion for at least 12 months
There are many points to consider when implementing a new salary sacrifice scheme. First and foremost the employee must not be able to revert back to the higher salary at will. HMRC will generally accept that a salary sacrifice that applies for at least one full year is valid.
For HMRC to regard a salary sacrifice arrangement as effective, the following two conditions
must also be met:-
- the potential future remuneration must be given up before it’s treated as received for tax or NI purposes (in other words it can’t apply to salary that has already be paid to an employee); and
- the amended contractual arrangement between the employer and the employee is that the employee is entitled to lower salary or wages and a benefit.
Effects of the Reed Case
Following the ruling in the Reed Employment Agency case HMRC will not usually accept that a worker’s contract has been amended unless there is:
- a new contract of employment issued following a salary sacrifice which includes reference to the arrangement; or
- that, the employee is provided with a letter or other notice from the employer explaining the consequences of the arrangement.
HMRC doesn’t regard a salary sacrifice arrangement as being effective if it enables the employee to continue to be entitled to the higher salary, and in effect all that has happened is that the employer has applied part of the remuneration on the employee’s behalf to securing the benefit. If HMRC doesn’t accept that the arrangement is effective, the employee will continue to pay tax and NIC on the original cash salary and will not benefit from any exemptions associated with the substituted benefit.
Concerned employers should make written applications to HMRC for clearance that their salary sacrifice arrangements are effective. Unfortunately, HMRC will not comment in advance as to whether proposed salary sacrifice arrangements are effective. This means that great care must be taken up-front to ensure that the proposed arrangements meet the two conditions set out above.
How emTax can help
emTax consultants have extensive experience of reviewing existing salary sacrifice arrangements and have prepared several successful submissions to HMRC to obtain tax clearance for them. This is definitely an area that will be looked at closely at your next Employer Compliance Review and at your HMRC “Know Your Customer” meeting.
We can first of all review your current salary sacrifice arrangements and advise on their effectiveness as well as making suggestions on how to improve on any areas of weakness we discover.
We can then contact HMRC on your behalf to ensure that HMRC agrees the salary sacrifice is fully effective. Any submissions we make to HMRC will be carefully managed on the basis of full disclosure (i.e. cards face up on the table), to completely safeguard you against any future inspections by HMRC.