Salary sacrifice agreements are made between an employer and employee to ‘sacrifice’ part of an employee’s salary in exchange for non-cash benefits. These benefits might be pension contributions, child care vouchers or a company car, for example.
Accepting a salary sacrifice reduces an employee’s taxable income, so they pay less income tax and National Insurance. For the employer it also means lower Employers’ National Insurance Contributions. It sounds like a great arrangement, and it most cases it works well. Life does have a habit of throwing change our way though – so what does that mean for this sort of scheme?
How do life events affect salary sacrifices?
When major changes crop up in life, they can sometimes have a considerable impact on personal finances. Life events such as marriage, divorce, pregnancy, or a partner’s redundancy can all have a significant effect.
These might mean a re-think for employees who are sacrificing part of their salary in exchange for a non-cash benefit. If personal circumstances affect finances, an employee might prefer to be paid the cash instead.
Though employees can opt in or out of a scheme as they wish, their reasons for doing so must be what HMRC recognise as a ‘life event’ in order for the tax advantages to apply.
The main life event we’re all thinking about right now is, of course, COVID-19. It’s impact has been enormous and, just like any event which changes an employee’s financial circumstances, may warrant revisiting the agreement. Fortunately HMRC have agreed that coronavirus should be considered a life event as far as salary sacrifice agreements are concerned.
The impact of COVID-19 on salary sacrifice
Furloughed employees also found that salary sacrifice caused some unwanted side-effects when calculating furlough pay. Employers claiming furlough costs through the Coronavirus Job Retention Scheme (CJRS) are required to base their claim on an employee’s recent earnings.
Unfortunately this means that CJRS is worked out using the figures from a worker’s salary after the salary sacrifice is taken out. In some cases this forced employees to consider opting out of the sacrifice scheme.
The good news is that HMRC recognise COVID-19 as a significant enough life event to allow employees to opt out.
Just remember though, the employment contract is an essential part of recording any changes that happen, and this includes salary sacrifice schemes. If employees opt in or out of a salary sacrifice agreement, their contract must be updated to reflect the changes even if they are currently furloughed.
Can you apply salary sacrifice to furlough pay?
You will be able to continue a salary sacrifice whilst an employee is furloughed. However, the CJRS grant must be paid in full to an employee, so salary sacrifice deductions cannot be taken out of it.
This means that whilst the sacrifice scheme can continue to operate, the amount sacrificed must be taken from salary which is paid in addition to the grant.
In some cases businesses are reducing staff salaries to cope with COVID-19, though the salary sacrifice arrangement will remain intact. In the case of pensions, employers must continue to pay contributions which are based on actual pay received.
Reducing or stopping salary sacrifice
As an employer you can reduce pension contributions made through salary sacrifice, providing you are auto-enrolment compliant. Because this is a contractual arrangement it’s important that the employee consents to this. The same goes for stopping the arrangement altogether. You can do this, but the employee must agree to it.