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Salary sacrifice is an agreement between the employer and employee by which the employee foregoes future remuneration in exchange for the employer paying the equivalent amount as a contribution to a pension scheme.
By foregoing remuneration, an employer and employee may reduce their obligations to pay National Insurance (NI) contributions. Salary sacrifice may offer significant advantages to employers, with opportunities in millions in NI payments, and often with union support. Pensions salary sacrifice can be offered as a stand-alone option, alongside other salary sacrifice arrangements, such as child care vouchers. Alternatively, it can operate under the umbrella of, or perhaps as a precursor to, a broader flexible benefits scheme offering the potential for further NI savings and greatly enhanced employee appreciation of their benefits package.
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Salary sacrifice—checklist Since 6 April 2017, the income tax and National Insurance Contributions (NICs) advantages where benefits in kind are provided through salary sacrifice arrangements (described in the Finance Act 2017 as ‘optional remuneration arrangements’) have been largely withdrawn. Guidance on optional remuneration arrangements from 6 April 2017 starts at EIM44000. The optional remuneration provisions made no changes to the underlying salary sacrifice principle, but did change how the benefit is taxed. Subject to some transitional arrangements, all benefits provided under an optional remuneration agreement are taxed at the higher of the standard benefit in kind value valuation (usually the cost to the employer or, for certain benefits, a specified calculation) or the amount of salary sacrificed. The optional remuneration arrangements rules do not apply to pension contributions, cycle to work or cars with CO2 emissions of 75 g/km or less. In addition, they do not apply to childcare vouchers, workplace nurseries, or directly employer contracted childcare started on or before 4 October 2018. The government has also confirmed it...
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Since 6 April 2017, the income tax and National Insurance contributions (NICs) advantages where benefits in kind are provided through salary sacrifice arrangements (described in the Finance Act 2017 (FA 2017) as ‘optional remuneration arrangements’) have been largely withdrawn. Guidance on optional remuneration arrangements from 6 April 2017 starts at EIM44000. The optional remuneration provisions made no changes to the underlying salary sacrifice principle, but did change how the benefit is taxed. Subject to some transitional arrangements, all benefits provided under an optional remuneration agreement are taxed at the higher of the standard benefit in kind value valuation (usually the cost to the employer except for certain benefits) or the salary sacrificed. However, note that the optional remuneration rules do not apply to pension contributions, employer provided pensions advice, workplace nurseries, directly employer contracted childcare, cycle to work or ultra low emission cars with CO2 emissions of 75 g/km or less as well as certain employer supported childcare arrangements entered into on or before 4 October 2018.Practicalities of achieving an...
Salary sacrifice (also known as ‘salary exchange’) is an arrangement in which an employee agrees to contractually reduce their entitlement to cash remuneration in exchange for receiving a non-cash benefit. The non-cash benefit may be provided in a tax and National Insurance Contributions (NICs) beneficial manner.Salary sacrifice arrangements can be made in relation to ongoing cash remuneration (eg salary) as well as in relation to once-a-year or one-off situations (eg bonus and termination payments).HMRC recognises that, in principle, salary sacrifice arrangements, properly implemented, are not treated as tax avoidance.However, the government was concerned by the rapid growth of salary sacrifice arrangements and restricted the operation of salary sacrifice arrangements through the introduction of the optional remuneration arrangements (OpRA) rules which, in essence, mean that (except in relation to certain specified benefits) an employee will receive no tax advantage and an employer will receive no employer’s NICs advantage in relation to such arrangements (although an employee will continue to receive an employee’s NICs advantage).Usual tax implications, including optional remuneration arrangementsEffective salary...
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Letter from company inviting employees to join salary sacrifice [Insert name and address of employee] [For use only where the employee is foregoing salary for the following benefits that retain Tax and/or National Insurance contributions (NICs) advantages permitted pursuant to the Finance Act 2017: • Employer contributions to registered pension schemes • Cycle-to-work schemes • Ultra-low emission cars] [Insert date] Dear [insert name of employee] [insert name of company] (the Company) [operates OR is introducing] a salary sacrifice scheme in which you may participate if you so wish. It is important that you fully understand the nature of the scheme before deciding whether or not to enter into it. So please feel free to ask any questions of the Company or take external advice before making any decisions. The scheme involves you voluntarily taking a reduction in your gross basic salary in exchange for the Company providing [describe benefit (eg: cycle scheme, pension)]. The
Acknowledgment of changes to terms and conditions of employment to implement salary sacrifices [insert date of letter] This document summarises certain changes to the contractual terms and conditions of employment between [insert name of employee] (you) and [insert name of employing company] (the Company). On [insert date of original letter from company], the Company advised you of arrangements through which, in exchange for a reduction in salary, you could elect to receive [describe the salary sacrifice arrangement (the non-cash benefit—pension, cycle scheme etc)]. You were duly furnished with a set of Frequently Asked Questions (FAQs) in relation to the potential arrangements. Having reviewed the FAQs and understood the proposals, you wish to renounce your future salary entitlement in the sum of £[insert amount of salary to be sacrificed] per [year OR month] with effect from [insert date on which first deduction should be made] until [[insert date on which last deduction should be made] OR
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What employment law issues should be on an employer's radar with the looming cost of living crisis? The cost of living crisis gives rise to a number of different employment law issues, which may include: Salary and benefits package • does everyone know what is available? • consider pension contributions • consider salary sacrifice schemes eg cycle to work, healthcare, childcare • is the package doing enough for those most in need? Identify the most vulnerable • consider the use of pay rises or one-off payments • ensure pay outcomes and processes are fair • across the board pay rises may not be the answer in the current climate, as high rates of inflation hit lowest-paid workers hardest • if pay rises are targeted at certain groups, consider risk of discrimination issues • consider effect on Universal Credit/other benefits for lower-paid staff Recruitment and retention • more difficult to recruit and retain staff in competitive market or where pay is constrained, eg public sector Communication and engagement • make sure...
What is the correct contractual structure for a salary sacrifice scheme? One of the key elements for an effective salary sacrifice arrangement is that the arrangements must constitute a variation of the employment contract. In order for the salary sacrifice arrangement to be valid, HMRC must be satisfied: • that there has been a legally effective change in writing to the employees’ contract of employment under which, on the true construction of the contract: ◦ the employee is entitled to less gross remuneration ◦ in exchange for a non-cash benefit, and ◦ the exchange was legally effective before the employee received the payment • there must be a clear understanding between the parties as to the terms of the arrangements; in particular the employee must fully understand the implications of what they are entering into, and • the employee is not entitled to reinstate the original higher cash salary (ie the change to a contract must be implemented with a reasonable degree of permanence. HMRC guidance suggests at least 12...
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This week's edition of Tax weekly highlights includes: (1) the UT decision in Nellsar on valuation, (2) the UT decision in Murphy on the validity of enquiries into share loss relief, (3) News Analysis on the FTT decision in Eyre on entrepreneurs’ relief, and (4) News Analysis on the UT decision in Scatola on the validity of enquiries into an SDLT avoidance scheme.
This week's edition of Pensions weekly highlights includes a review of key news stories, as well as dates for your diary and trackers.
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