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	Salary sacrifice: good for your staff, good for your business? It has been estimated that the average cost to a business of replacing an employee is as much as £4,000 – with the figure for managers at an average of £7,000. Businesses therefore need to consider how they can reduce this cost and improve business performance by ensuring that the workforce is content. And often contentment comes not from simple salary levels, but also from the ‘perks’ on offer. Many employers now offer new employees a choice in their remuneration packages – effectively offering a ‘menu’ and a fixed limit, up to which the new employee can choose from salary, pension contributions, life assurance and medical insurance, a company car, free car fuel and so on. But can the same ‘deal’ be offered to your current employees? Can they give up, or ‘sacrifice’, a part of their salary in return for additional pension contributions or other benefits? And if so, what can your business expect to gain? Salary sacrifice for current employees The basic rule is that this sort of ‘menu’ can be extended to existing employees, but only as long as: · salary is sacrificed before it is treated for tax purposes as paid, and · the employee’s contract is changed so that he or she becomes entitled to a lower level of salary plus the ‘benefit’ without any right to have the original rate of salary reinstated on demand. The latter point is particularly important when we look at tax-advantaged benefits like childcare vouchers, because if the benefit can be given up and automatically replaced with salary at any time, the salary sacrifice is not effective for tax purposes. If the sacrifice meets these essential criteria, your employee’s gross pay – on which tax and national insurance contributions will be calculated – will be reduced (although the usual rules apply for charging tax and employer NICs to the benefits). As a result of lower taxable benefits or specific exemptions and reliefs, this can mean lower net costs for you and/or your employee. A word of warning To be effective for current tax and NIC purposes the employee must not have the simple right to request cancellation of the ‘benefit’ and reinstatement of ‘full pay’ as HM Revenue and Customs will then be entitled to insist that the income tax and employee/employer NICs are all paid as if no sacrifice had been made – the ‘benefits’ are effectively exchangeable for cash, and consequently are included in ‘gross pay’ for tax and NIC calculations. Childcare vouchers Specific exemptions apply to an employer’s pension contributions and certain childcare provisions. We mentioned childcare vouchers earlier, and this is the example we will take to illustrate how you and your employees might be better off as a result of offering salary sacrifice. Employees are entitled to up to £50 per week in childcare vouchers and the provision of such vouchers is tax and NIC-free for the employee and NIC-free for the employer. To give your employee £50 cash to spend on childcare costs you more than £84, when you consider tax and the employee and employer NICs. The figure for an employee paying tax at 40% is more than £95. If, instead, you agreed a salary sacrifice with your employee, reducing his or her salary by £50 per week in exchange for a childcare voucher for £50 per week, your cost would reduce to £50 – saving you between £34 and £45 a week. Employees need to take advice where a sacrifice might affect their entitlement to such things as current or future state benefits and tax credits. However, keeping your employees happy by giving them a choice of ‘benefits’ and help with childcare could lock experienced people into your business and save you money. Talk to us about how salary sacrifice might benefit your employees and your business. Back to newsletter