Debi O’Donovan, editorial director of Employee Benefits: Why salary sacrifice is becoming so widespread

Salary sacrifice schemes are becoming ever more popular among employers striving to cut benefits costs in the current recession [Sub – Note: by January the UK should officially be in recession, but you can change this to economic downturn if you prefer]. And this popularity received a further boost with the Pre-Budget announcement of a 0.5% increase in employers’ and employees’ national insurance from 2011.
For those uninitiated in the droll topic of benefits tax breaks, salary sacrifice is a clever way for employers and employees to reduce the NI or income tax due on cash salary by going for benefits instead. So the employee gives up a portion of their salary and authorises the employer to buy benefits (such as pension contributions, childcare vouchers or a variety of other benefits which are tax and/or NI free if paid for by the employer) on their behalf.
In our Employee Benefits/Axa Pensions Research 2008 we found that well over half of large organisations (with more than 1,000 staff) now offer staff the opportunity to make pension contributions via salary sacrifice. Given the potential savings for large employers it has become something of a no-brainer for most – savings of hundreds of thousands or even millions of pounds are far too tempting for most to resist.
For organisations with just a few hundred staff, it is a case of weighing up the savings versus the complexity and cost of setting up this type of scheme. There is no doubt that setting up salary sacrifice is a minefield of employment law, dealing with the local tax office, avoiding falling foul of minimum wage and impinging on various tax credits. This is not a place to tread without a friendly tax expert leading the way.
Even the recent changes to the rules around the provision of benefits during maternity leave are causing consternation as employers realise they have to continue to supply a benefit purchased via salary sacrifice even though there isn’t a salary from which to deduct the cost.
However, as more finance directors get to grips with the money that can be saved by using salary sacrifice, so we expect more HR and benefits managers to be under pressure to go this route.
A worrying trend for HR and benefits managers, though, is that these savings are now frequently being taken straight back into the business, and not reinvested back into benefits or other HR initiatives (which until a year or so ago was common).