How to help employees manage their take-home pay when in a salary sacrifice scheme

Need to know:

  • Automation and payroll tools can flag if an employee is at risk of falling below the minimum wage because of salary sacrifice, but employers should be wary of becoming overly reliant on such technology.
  • Employee communications must illustrate clearly what the effect of salary sacrifice will be on pay, and the financial commitment being entered into, including the potential impact on loan applications.
  • Providers and employers must work together to communicate the risks and benefits of salary sacrifice.

The news in January 2019 that retailer Iceland was potentially facing a £21m bill from HM Revenue and Customs (HMRC) because its Christmas Club savings scheme had pushed some employees under the national minimum wage was hardly the most auspicious start to the year for providers and employers committed to salary sacrifice.

As Rebekah Tapping, head of HR at Personal Group, puts it: “The Iceland issue has been a curveball for all of us. The way in which HMRC is using the minimum wage and applying it is not how many employers expected it to be.”

Commitment to salary sacrifice

The fear of being on the receiving end of cases like this, as well as the government’s significant tightening of salary sacrifice benefits in 2017, have dampened the appetite for salary-based benefits, says Samantha Mann, senior policy and research officer at the Chartered Institute of Payroll Professionals (CIPP): “Salary sacrifice and optional remuneration reduction arrangements have certainly taken a dip in recent years.”

Further change may yet be on the horizon, as business secretary Greg Clark’s consultation on minimum wage rules and the operation of salary sacrifice schemes concluded in March.

When the government moved to limit salary sacrifice, the University of Lincoln, like many employers, carried out a wholesale review of its offering. Subsidised parking, gym membership and training all had to go, while its childcare voucher scheme is gradually running down as new parents shift to the government’s replacement tax-free childcare scheme.

Nevertheless, the university remains committed to salary sacrifice in principle, and still offers a bikes-for-work scheme, through Halfords, an ultra-low emission vehicles (ULEVs) scheme through Tusker, and from April 2018 even introduced salary sacrifice-based additional voluntary contributions (AVCs) through Prudential.

“Employees can salary sacrifice all but £1 of the AVC, and then get tax and national insurance [NI] relief at source. As the employer, we of course save on the NI, too,” says Ian Hodson, head of reward at the University of Lincoln.

Be aware of the rules

Given HMRC’s tough approach, employers need to ensure that staff entering into salary sacrifice arrangements do not inadvertently fall below minimum pay levels. It is also important that employees fully understand and can afford the financial commitment they are taking on.

“The main thing is, simply, to be aware of the rules,” advises Mann. “Payroll software can increasingly provide warnings and alerts, and [employers] can carry out regular checks using [their] payroll program. But it is important not to [assume] that the software can do all of this; it is the old adage ‘rubbish in, rubbish out’. Systems and processes can do so much, but it all comes back to the information going in.”

Hodson says that salary sacrifice has become administratively much more intensive. “We now spend a lot of time making sure we are not falling foul of the system,” he says. “There has been a huge investment in technology and systems to make sure people’s pay elements are compliant, and that payroll reporting is properly automated.”

Communicate clearly

Benefits communications should include tools that show clearly what the impact of sacrificing salary is going to be, namely: what the employee will be earning afterwards and what they will be taking home.

Employees will also need to understand the length of the commitment, and if they can afford the benefit for the whole period. With a bikes-for-work scheme, there is also a risk that staff might not fully understand that they have just been leasing rather than taking ownership of the bicycle.

Iain Thomson, director of incentives and recognition at Sodexo Engage, says: “The key is that things are visible. The employee must understand what they are getting into.

“For example, they have got to appreciate they are entering into a contract for the period of the agreement, and one that may not be easy to get out of. It may, too, have an effect on how their base salary is perceived if, say, they want to apply for a loan or a mortgage.”

Communication is a big focus for the University of Lincoln. “There is a lot of guidance on our benefits portal,” explains Hodson. “It is important employers also lean on the expertise their third-party providers can bring. How do we make sure we are not falling below the minimum wage, and what checks are [providers] going to be doing? We expect everything to be very clearly explained and articulated.”

Thomson adds: “As providers, we have to take responsibility for ensuring our clients understand what is being offered; we need to give them the right tools, guidance and support. But employers also need to take some responsibility, because they will know their employee audience and what messages or communication will work best.”