A salary sacrifice arrangement is a contractual agreement between an employee and an employer, where the employee exchanges a proportion of their pensionable pay for non-cash benefits.
You must submit a request to your employer if you wish to take advantage of the salary sacrifice arrangement.
You can ask them to provide you with a breakdown of what your cash and non-cash entitlements are if you enter into an arrangement.
You are advised to consider not only the benefits of these schemes, but the impact this may have on your pension.
A salary sacrifice arrangement in Scotland will not reduce your pensionable pay. The guidance below, as it relates to pension implications, is for members in the NHS in England, Wales and Northern Ireland.
What benefits you can access
Examples of available salary sacrifice arrangements include:
- childcare vouchers
- cycle to work scheme
- car hire/lease scheme
- on-site nurseries
- home computers
- car parking
- gym membership
- pre-paid store cards
- personal learning.
For each salary sacrifice arrangement, both employee and employer must agree on what the cash value of the benefits on offer is worth to both groups. This ensures that the benefits from these arrangements fairly compensate the employee for their loss of income.
Sacrifice arrangements tend to remain in place for at least 12 months, unless the employee experiences a lifestyle change. These arrangements are then reviewed, and, dependent on mutual arrangement, they are either renewed or removed from the employee’s contract.
See how you could benefit from the annual allowance compensation scheme 2019/20 - introduced to combat potential tax charges on clinicians who want to work more and help their patients but can't without being charged. Although the closing date of the policy in England was 31 March 2022 late applications can still be made up to 6 months after you have received the relevant information. This facility will also be available should the McCloud remedy mean that a tax charge is incurred in 2019/20.
Adjusting your arrangement
You have the right to adjust your salary sacrifice arrangements in the event of a lifestyle change.
Your employer would ultimately decide what constitutes a lifestyle change, and we would expect this to follow the employees wishes. A lifestyle change can include:
- marriage
- divorce
- your partner becoming redundant or pregnant
- COVID-19.
Earnings cannot fall below the national minimum wage, otherwise employers will be subject to fines for breaching regulations. If you have any concerns, we would recommend that you raise this with your employer.
Implications
Tax and national insurance benefits
Prior to 6 April 2017, all salary sacrifice arrangements were made prior to assessing a doctor’s income against income tax and NI. This had the effect of lowering the amount of tax and NI contributions due on the doctor’s salary, thereby incentivising employees to engage in such arrangements.
From 6 April 2017, the Government removed any tax and employer national insurance advantages for salary sacrifice schemes, except in five areas where such arrangements can be made. These are:
- increasing employer pension contributions to registered pension plans (eg buying additional pension)
- an employee securing advice on their pension
- employer supported childcare consisting of either:
- childcare vouchers provided by the employer for qualifying childcare, (only applicable to those employees who joined the relevant scheme prior to 4 October 2018)
- directly contracted or employer contracted childcare, where the employer directly arranges for the provision of qualifying childcare - cycle to work schemes
- ultra-low emission cars (emissions under 75 grams of CO2 per kilometre).
Tax and national insurance advantages for employees who were enrolled in a non-qualifying car, accommodation, or school fee salary sacrifice arrangement will be removed from either 5 April 2021, or by the end date of their agreement with their employer, whichever is sooner.
There is no tax nor national insurance contribution advantage in providing any benefits through a salary sacrifice arrangement aside from the five arrangements outlined above. This includes charitable donations, car parking and gym membership.
If a salary sacrifice arrangement is used to provide other benefits outside of the five noted, income tax and national insurance contributions arise on the higher of the:
- amount of salary sacrificed, or
- the cash equivalent of the benefit.
Read more from HMRC.
Salary sacrifice differences between pension schemes
The guidance below relates to England, Wales and Northern Ireland. Salary sacrifice arrangements in Scotland do not reduce the amount of pay treated as pensionable.
The 2015 scheme is a career average revalued earnings scheme. This means that your income in retirement is based on a proportion of your average earnings, after adjusting these for inflation, over the period you were a member of the scheme.
Pension benefits are built up annually, reflecting the progression in salary. Therefore, any change to your salary each year will have an impact on your annual gross pensionable pay.
Taking out a salary sacrifice scheme will therefore permanently reduce any pension benefits that you accrue in the 2015 scheme and this must be considered when assessing the benefits of entering such an arrangement.
The impacts on salary sacrifice in the 1995 scheme can be complex.
When you enter into a salary sacrifice scheme, this deduction reduces your pensionable pay. The value of your pension is determined by the final pensionable pay, which is the best of the last three years. This is the same for testing against annual allowance taxation.
Consequently, if you hold a salary sacrifice for a span of more than two tax years, the 'best of the last three years' pensionable pay will fall, leading to a reduction in the value of your 1995 pension.
This can be problematic as under the taxation rules, no allowance is made for the fact that the value of your pension has fallen. This this negative growth is not offset against any growth you may have in the 2015 scheme if you are a member of both schemes.
If you end the salary sacrifice scheme before retirement, this causes a growth in the deemed value of your pension. Even if the total value doesn’t exceed the value of the pension that was in place prior to entering the salary sacrifice, you may become liable for an annual allowance tax charge simply as a result of ending a salary sacrifice scheme.
If you keep the salary sacrifice in place until you retire, the reduced final pensionable pay causes a permanent reduction in the value of your pension. Again, this needs to be factored in to your decision making when entering a salary sacrifice scheme.
Read more from NHSBSA.
Similar problems with a reduction in pensionable pay to those that happen in 1995 section also occur in the 2008 section.
However, the way final pensionable pay (known as 'reckonable pay') is calculated in the 2008 section is different and provides some mitigation against this problem.
Final 'reckonable pay' is the average of the best three inflation adjusted years in the last 10, so this can result in some 'smoothing' of pay fluctuations that occur as a result of salary sacrifice.
However, the calculations are complex, and you need to model the impacts on your pension or take financial advice if considering entering into a salary sacrifice scheme.
Read more from NHSBSA.
Final pay controls for employers
There are rules in place that discourage employers from awarding employees significant rises in their pensionable pay close to retirement. These are known as final pay controls and are designed to prevent people receiving additional pension that they have not paid much in employee contributions for.
Ending a salary sacrifice close to retirement causes a rise in pensionable pay and this may have resulted in an employer being charged under a final pay control.
From 1 July 2021, and with retrospective effect to 1 April 2018, if your employer was subject to a final pay control charge as a result of a salary sacrifice arrangement ending this may be reimbursed.
Applications for reimbursements must be made by 31 December 2021.
This example of leasing a car via salary sacrifice demonstrates how a salary sacrifice scheme can work.
Impact on other benefits
A reduction in salary from sacrifice arrangements means that work-related statutory payments (payments paid by the employer and based on average earnings over a fixed period, such as statutory maternity pay and statutory sick pay) will also be affected. The reduced salary figure will be used in any calculations of these payments.
Furthermore, a lower salary as a result of a salary sacrifice arrangement could reduce the value of benefits available in the NHS pension scheme, such as death in service and ill-health retirement benefits. Furthermore, mortgage applications will be made based on a member’s lower salary.
What to consider
There are a number of points that you should consider before entering into a salary sacrifice arrangement with your employer.
- The cost of the arrangement in terms of the loss of income, and its impact on other benefits accrued outside of salary sacrifice arrangements.
- How the cost of the arrangement compares with what value you could secure through purchasing the service or benefit yourself.
- The impact of engaging in this arrangement on your future pension for members of the NHS pension scheme (excluding Scotland).
- How vital the arrangement is to you being able to work. This includes the need for necessary costs, including childcare vouchers.
