It is a while since we have covered salary sacrifice in our monthly articles but now is probably a good time to return to this subject given the amount of detailed reviews being carried out by HMRC just now on existing schemes.

If you have read any of our previous articles on salary sacrifice you will know that we always recommend that particular care is needed in relation to employees joining or leaving the business in the context of managing salary sacrifice arrangements. The simple reason for this is that there are a number of practical issues to consider when someone joins or leaves a salary sacrifice scheme outwith the norm and many employers fail to properly deal with these issues, often resulting in extra tax and NI charges arising.

We highlight below some of the practical issues employers need to plan for and deal with to avoid problems with their salary sacrifice arrangements.

Starters

1. Should we allow the new employee to participate in salary sacrifice straight away ?

There are many factors that will be in play here as to whether this is sensible and feasible e.g.

  • Temporary workers - probably not, but care is needed around the Agency Worker Regulations where temporary appointments exceed the time limits allowed in the AWR
  • Employees working a probationary period - why is there a probationary period ? Does the company ever use this as a reason to terminate the employment early ? Are there any other restrictions on employment terms until the probation period has lapsed ? What are the risks if the probationary employee is allowed into the salary sacrifice scheme before the probationary period ends ?
  • Trainees - will they be working at a different location initially ? Will there be other factors that could affect their lifestyle choices or income in the initial employment period ? Would it be better to offer salary sacrifice when things are more settled and consistent for the employee ?

2. Will excluding or delaying anyone affect the overall tax exemption for the salary sacrifice scheme ?

Some salary sacrifice arrangements, such as Childcare Vouchers and the Bike to Work scheme, only qualify for tax exemption where the arrangements are made available to all employees. HMRC has relaxed this rule in recent times in  limited circumstances, e.g. where an employee cannot take Childcare Vouchers under salary sacrifice because this would take them below National Minimum Wage levels, but on the whole, if ANY employee is excluded for whatever reason then this potentially puts the whole scheme at risk from a tax point of view.

3. Timing requirements for tax

One of the conditions for an effective salary sacrifice is that the right to the earnings being sacrificed is given up before any entitlement to the earnings arise, e.g. for monthly paid staff, the right to a pro rata element of the month's earnings usually begins on the first working day of that month. It is therefore essential that any agreement is made prior to the relevant earnings period to avoid any tax issues.

4. HR admin

For some smaller companies, allowing new starts to participate in salary sacrifice as soon as they join the business may not be too much of an admin burden to HR as this may only happen a few times in a year.

However, for larger employers, or those with a high turnover of staff, allowing employees to sign-up willy-nilly could be a huge problem for HR with all the extra admin that this involves.

Consideration may therefore be needed as to what works practically, e.g. would a joining window every 3 or 6 months be better than doing things adhoc or would a once a year window for all employees, including new starts, be the only workable option ?

Leavers

This is normally an even bigger problem than new starts.

1. Salary sacrifice schemes involving assets (e.g. bikes, cars)

Where an employee leaves employment and is leaving a salary sacrifice scheme early decisions need to be made as to what happens to the asset. Different rules may apply to different assets, e.g. with the Bike to Work scheme it may be that the employee pays extra (over and above any outstanding rental charges) to retain the bike on leaving, whereas with a car scheme, the car would normally return to the employer or lease company.

Clear rules need to be in place to ensure the employer is not left out of pocket or left with a mountain of bikes or cars that need to be sold or passed on to other employees.

2. Early termination charges

With ongoing arrangements such as pension contributions or Childcare Vouchers, it is fairly easy to end the arrangement immediately with no extra or ongoing charges occurring. However, with schemes involving assets, and some others, e.g. employer supported further education. there may be extra charges levied by the provider for early cancellation of the agreement.

Again, clear policies should be in place to clarify who will be responsible for paying any extra charges and how this will be managed.

3. Insurance

Is early termination insurance available ? Would this be a sensible way to manage risk of employees cancelling early ? Who should pay for the insurance (company or employees) and how should this be done ?

Early termination insurance is not for everyone but it may be suitable in some cases.

4. Tax issues

Care needs to be taken here, especially in cases where additional charges have been levied by the benefit provider, as additional tax liabilities can easily arise if the salary sacrifice arrangement, and final payments, are not managed correctly. Any extra tax would be levied on the EMPLOYER usually with all the usual interest and penalty charges on top where this was uncovered later on.

There may be other unique factors to watch out for from a tax point of view with individual arrangements, e.g. Bike to Work, to avoid further tax charges arising.

Managing Risk

Early leavers of salary sacrifice schemes is more of a problem for larger employers, or those with a higher than everage turnover of staff.

As well as some of the tax and cost problems we have alluded to above, the additional admin involved from an HR and Payroll point of view cannot be ignored, as well as some of the legal risks the company may face e.g. a disgruntled employee not returning a car or bike or whatever.

How should these risks be managed ? What procedures and rules need to be in place to minimise risk ?

 

Conclusion

As we said earlier, the issue of starters and leavers to a business can cause all sorts of headaches to the employer in the context of salary sacrifice arrangements.

Too many employers in our view do not give these matters enough consideration when implementing salary sacrifice schemes, the proof of this is in the pudding, i.e. the number of cases where either we or HMRC uncover extra tax liabilities often many years down the line.

Ignore these issues at your peril. Tax, Legal, HR, Resource problems abound, many of which can have a huge financial and reputational cost if you do not deal with these matters upfront and properly.

As ever, we have lots of experience in helping employers with these issues so please do contact us for a chat if you need any assistance.

 

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