Salary Sacrifice Schemes – HMRC provides answers to employers’ questions

Monday, August 18th, 2008

UK FlagA further series of questions and answers on the operation of salary sacrifice (SS) schemes has been published on HMRC’s website. Some of the questions appear to have been prompted by the recently published guidance on the changes to be made to the provision of benefits-in-kind during maternity leave from October 2008.

The following notes highlight some of the key points made in HMRC’s answers.

Can employees opt in and out of a salary sacrifice scheme?

HMRC’s interest in SS schemes is limited to ensuring that the correct amount of tax and NICs are always paid. The opportunity for employees to “opt in and out” of a scheme is a contractual matter. Each variation to an employee’s terms and conditions, whatever its frequency, must reflect a legally enforceable contractual change. Tax and NICs liabilities are based on the current contractual situation. (This appears to relax the existing guidance in the Employment Income Manual, at http://www.hmrc.gov.uk/manuals/eimanual/EIM42767.htm, which instructs tax inspectors to report contractual changes after less than 12 months to the Employer Support Team for review. It may be a response to the rules of some childcare voucher schemes that appear to allow frequent contractual changes.)

If the terms of an SS scheme allow the provision of an exempt benefit to revert to cash salary within a set period of time, the exemption is lost and tax and NICs are due on the benefit as if they were earnings. This does not apply, however, to three particular benefits, namely, employer-provided childcare (not childcare vouchers), workplace parking, and employer-provided cycles and safety equipment. The tax exemption continues to apply even if the benefit can be given up readily for cash. As a result, an SS scheme that takes advantage of these exemptions does not need to specify a period of time for which the arrangement must operate before consideration is given to reversing it. Equally, there is no need to make provision for “lifestyle” changes for such schemes.

How should “lifestyle changes” be used?

Many SS schemes includes “lifestyle change” provisions that allow the current terms and conditions to be changed within a period of time that would otherwise suggest that the benefit can be readily given up for cash. HMRC accepts that this provision may justify changing the arrangement before the intended period has elapsed.

Examples of unforeseen “lifestyle changes” are redundancy of a partner, pregnancy of employee or partner, marriage or divorce of employee. In the event of such a change in the employee’s circumstances, it is still up to the parties to agree to new terms and conditions, which may not necessarily involve reverting to the original salary.

What information should be shown to HMRC when a new scheme is set up?

There is no statutory requirement for employers to notify HMRC when a new scheme is set up. Employers may, if they wish, ask their local tax office to confirm that the arrangement is tax effective. For that purpose, the tax office would need to see evidence that there has been a contractual change. This would include documents showing the contract variation, copies of payslips before and after the change, and information about the particular benefit being provided. For example, in the case of a scheme involving childcare vouchers, a copy of the voucher scheme rules would need to be provided.

What if the payslip shows the sacrificed salary as a deduction from the old gross pay?

Some payroll systems can only hold one value as gross pay, so the old salary is retained in order to calculate related payments such as overtime. In this situation, the amount by which the original salary has been reduced contractually is handled as a deduction.

As long as the contractual change is properly documented elsewhere, it does not matter what the payslip shows. If, however, if there are no other documents, or the details are ambiguous, the payslip may be considered and could suggest that the salary sacrifice is not valid.

Handling the sacrifice as a deduction from gross pay could lead to reporting errors at the year end. The gross pay reported on the P14 and P35 returns must be the reduced contractual salary, so the payroll system must be capable of handling the figures accordingly. For example, an employee’s pre-sacrifice wage is £400 per week. The sacrifice involves a contractual wage reduction to £350 per week, and childcare vouchers to the value of £50 per week are provided instead. The payslip continues to show gross pay as £400, and a pre-tax and pre-NICs deduction of £50. Assuming the arrangement is in place for the full year, the employee’s P14 must show the employee’s “pay” as £18,200, i.e. 52 × £350.

A further question, not directly related in any direct way to salary sacrifice schemes but a continuation of the above question, asks if an employer can put taxable benefits through the payroll for tax purposes. The answer is that there is no statutory provision for this but employers may do so if they have an informal agreement from their tax office. Liabilities for Class 1 and Class 1A NICs must be handled correctly, including reporting the benefits and the tax deducted on form P9D or P11D. The value of the taxable benefit will be included in the figures shown on the year-end P14 and P35 returns and the employees concerned must be told that their benefits have been taxed in this way so they have the necessary information for completing, if required, a self-assessment tax return, or for claiming tax credits. Any informal arrangements must include details of how the employer plans to provide details of the value of the benefit to HMRC and to the employee.

Further information:
Salary Sacrifice Q&A


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