How to set up salary sacrifice benefits for employees
We all want to deliver a fantastic employee experience, and salary sacrifice benefits are a great way to give extra value to your workers: helping them to look after their finances, health and leisure time.
However, salary sacrifice and payroll integration don’t always go hand in hand, and getting it wrong can be costly. Follow these simple steps to set up salary sacrifice benefits for your employees.
Select the benefits you want to offer to your employees
There isn’t a one size fits all when it comes to benefits. Employee A might like extra holiday days and sipping cocktails by the pool, while Employee B prefers cashback on their B&Q decking. It’s all about balance!
This also goes to the heart of workplace diversity. Wine club membership, cycle to work schemes and childcare vouchers almost by definition exclude some people due to their protected characteristics, such as age, disability, and pregnancy, while being highly attractive to others. The opportunity to pay more into a pension scheme may be welcomed by your older employees, and while there’s nothing to stop everyone doing that, it may feel irrelevant – or just unaffordable – to those closer to the start of their careers.
This is why it’s so important to offer a diverse range of benefits, discounts and cashback that are attractive and relevant to your whole workforce.
Offering a wide range of benefits ensures you are supporting a diverse workforce.
Ensure opt-in terms are outlined
It’s important that your employees are clear on what their cash and non-cash entitlements are at any given time. That’s why opt-in terms and conditions must been included – not just for salary sacrifice, but all benefits. Alternatively, this can be included in employee contracts, though bear in mind this might entail a lot of manual changes if benefits are frequently changed or you have a lot of employees.
Ensure this information pulls into payroll
The benefit to an employee is that salary sacrifice options are taken from their pay before it even hits their bank account. To make this possible, opt-in must pull into your payroll software. Clever software and robust integration will ensure you’re paying your people correctly when considering their sacrifice options.
Work out the effect on tax and National Insurance contributions
The impact on tax and National Insurance contributions payable for any employee will depend on the pay and non-cash benefits that make up the salary sacrifice arrangement. You need to pay and deduct the right amount of tax and National Insurance contributions for the cash and benefits you provide. For the cash component, that means operating the PAYE system correctly through your payroll.
However, there are some salary sacrifice schemes that are exempt from tax and national insurance contributions on non-cash benefits, these include the below:
- Payments into pension schemes
- Employer provided pensions advice
- Workplace nurseries
- Childcare vouchers and directly contracted employer-provided childcare that started on or Before 4 October 2018
- Bicycles and cycling safety equipment (including cycle to work)
Review & maintain
It’s worth checking with your employees that their needs are being met in terms of benefits offered. Capture the ideas of your employees to ensure these are considered in future benefits.
Things to note about salary sacrifice benefits
Minimum wage
Depending on an employee’s salary and hours worked, salary sacrifice benefits could take your employee under national minimum wage. This is of course unlawful and opens your business to a huge risk!
Clever software will cap the number of benefits employees can opt for to mitigate risk. It is the responsibility of the employer to put procedures in place to cap salary sacrifice deduction and ensure NMW rates are maintained.
Remember that employees who need to provide proof of income, for example to landlords or mortgage lenders, will need their base salary quoting in order to properly demonstrate affordability.
Enrolment windows
Enrolment windows are when all employees must select benefits within a given period in the year – often just before the new financial year or the calendar year starts. Ultimately, it’s up to you as an employer to either select a window or allow employees to enrol year-round.
