Many were predicting that regulation changes introduced in April 2017 would prove a virtual death knell for salary sacrifice – which could produce tax and NI savings when employees gave up entitlement to a proportion of salary in exchange for receiving certain benefits from their employer.
But well over a year later salary sacrifice is still very much alive and kicking. It has increased in popularity for those employee benefits exempted from the changes, and started to be appreciated for different reasons for products that were penalised.
In April 2017 tax and employer NI relief was scrapped on salary sacrifice schemes for all but five benefits – pension contributions (including additional death-in-service cover under a flex scheme), employer-funded regulated individual pension advice, Childcare Voucher schemes, Cycle to Work schemes and holiday “buy” schemes.
Many employers had held back from using the approach as there had been long-standing rumors that the Chancellor had intended to clamp down on it. But, now that the cloud hanging over the exempted benefits has been removed, usage of them has found a new momentum.
This has proved especially the case with pensions, which around 80% of our clients now use salary sacrifice for. In particular, the ability to save 13.8% in NI on employees’ pension contributions has come into much sharper focus since total minimum auto-enrolment contribution levels increased from 2% to 5% this April, depending on the structure of the scheme.
If employee contributions were made via salary sacrifice, an employer with a 30 strong workforce with an average salary of £30,000 would have been saving £1,242 NI per annum on employee pension contributions of £9,000 at the old 1% contribution level (where contributions are based on total earnings). But, with its employee contribution levels (and the amount of salary sacrificed) having risen to 3%, the same employer’s NI saving has rocketed to £3,726 per annum.
When we do still come across the odd firm that doesn’t use salary sacrifice for pensions we find that they have often been put off by the idea that implementing it is likely to prove highly complex. But nothing could be further from the truth because an expert firm of employee benefits consultants like Chase de Vere can handle the entire process on your behalf from beginning to end.
Even with products that have been impacted by the rule changes, many employers have failed to appreciate that employee NI relief is usually available as long as the benefit cannot be converted in cash. This will save an employee either 12% or 2% depending on earnings.
But, perhaps more importantly still, our experience suggests that other factors that drive employees to take up salary sacrifice schemes can be every bit as important as NI savings.
We find that the primary attraction is invariably the ability for the employee to spread the cost of the benefit they are purchasing over 12 months because many people don’t have access to cheap and easy credit.
Employees can also greatly value salary sacrifice schemes for the fact that they do not involve having to undergo credit checks and for the convenience of having payments deducted directly from salary.
Further attractions include the ability of the supplier and employer to negotiate bulk discounts and the confidence that employees can gain from knowing that the former has been suitably vetted by the latter.
For example, one of our clients uses salary sacrifice in conjunction with a will writing service which was not exempted from the April 2017 rule changes and has no employer tax or NI advantages. But, because the negotiation of a discount has made the pricing particularly competitive and, because employees are impressed both by the quality of the offering selected for them and the ease with which it can be facilitated, it has achieved a take-up rate of nearly 50%.
It is therefore important that employers understand what benefits will drive engagement with employees and do not dismiss salary sacrifice schemes simply because they are not as tax-efficient for some employee benefits as they have been in the past.