Salary Sacrifice Guide for Employees

The concept of salary sacrifice (sometimes known as salary exchange) is fairly simple.  From a legal perspective it is an arrangement where you are agreeing to change your terms and conditions of employment relating to your pay to enhance employee benefits.  In this example, the agreement requests your employer to reduce your salary and have the sacrificed salary paid into your pension.  The pension contribution can be enhanced by your employer if they choose, as they do not have to pay National Insurance (NI) on the ‘sacrificed’ salary.  This NI saving can then be redirected into your pension.  You too will also benefit from not having to pay NI on the ‘sacrificed’ salary and can decide whether this saving is paid into your pension or taken as additional income.
 
The salary sacrifice arrangement requires you to agree to a change in your contractual pay which can be documented as either a permanent contract change or a temporary change for a stated period of at least 12 months.  HM Revenue & Customs accepts that certain lifestyle changes may justify changing a salary sacrifice arrangement before the intended period has elapsed.  This is generally used for the unforeseen life events such as redundancy, marriage, divorce or pregnancy where your employer may agree to vary the salary sacrifice arrangement.

The advantages can be summarised as follows:-

 Pension contributions are recorded as ‘employer’ contributions which means they do not have to be declared on a tax return in order to receive full tax relief (i.e. for higher rate taxpayers).
 
The employer is not required to pay NI on the sacrificed income which can be redirected into the employee’s pension.
 
For the tax year 2022/23 NI of 13.25% is payable by an employee on earnings between the primary threshold, £9,880 (increasing to £12,570 from 6 July 2022) and the upper earnings limit, £50,270.  In addition, employees pay 3.25% NI on any earnings above the upper earnings limit.  By electing to have the employer pay the pension contribution in lieu of the sacrificed salary, the employee’s NI is also saved.
 
By reducing your salary (or paying more into your pension) you may also become eligible for Working Tax Credit, Child Tax Credit or other means-tested State benefits, dependent on your circumstances.
 
If you pay Higher Rate tax you may previously have reclaimed some of this through your Tax Coding or Tax Return as a result of contributing to a pension.  By utilising salary sacrifice you are effectively getting the same relief directly through payroll and you will not need to detail this on your Tax Return.  If your Tax Code currently contains an allowance for a pension contribution then we encourage you to contact your Tax Office informing them your ‘personal’ contribution has reduced/stopped.  If you do not do this you will temporarily get two lots of tax relief, resulting in an underpayment of tax – this will then be reclaimed through Self Assessment.
 

The disadvantages of salary sacrifice can be summarised as:-

Salary levels are often used to calculate many financial benefits and budget forecasts such as income protection, state benefits (for example, Statutory Maternity Pay, Statutory Adoption Pay, Statutory Sick Pay, Incapacity Benefit (Employment & Support Allowance), Jobseeker’s Allowance etc).  By reducing your salary this may have an effect on these benefits which should be considered when sacrificing income.  For most employees paying less in National Insurance will not adversely affect your entitlement to some State benefits but may affect those benefits which are based on payment of NI.  The Lower Earnings Limit is currently £123 per week (2022/23 tax year) – anyone earning below this amount does not pay NI.
 
Reducing your salary may have an adverse effect on your ability to borrow money (for example, mortgages, credit cards, personal loans etc).  However it should be noted that many mortgage lenders will take into consideration that pension contributions are being paid by salary sacrifice and you will be able to get a letter from your employer as evidence of this.
 
Generally, the maximum annual contribution you can make to a pension (and receive tax relief) is limited to 100% of salary up to the annual allowance (£40,000 for 2022/23 tax year).  By reducing your income you may be effectively reducing the maximum figure that you can invest in a pension. 
 Salary sacrifice is only available through an employer’s scheme and is a cost effective way of funding a pension.

 Other Factors Employees Should Be Aware Of:-

 All other benefits provided by your employer, for example Death in Service will be calculated in relation to your pre-sacrificed salary.
 
If you are receiving a Working Tax Credit or Child Tax Credit, salary sacrifice may affect how this benefit is calculated.
It is our understanding that you can disclose your post sacrificed salary for this purpose.  However we recommend that anyone already in receipt of this benefit should seek individual advice from their nearest HM Revenue & Customs enquiry centre, if in any doubt about how it will affect them.
 
A pension is a long-term investment not normally accessible until 55 (57 from 2028).  
 
The value of your investments and income from them can fall as well as rise and is not guaranteed, which would have an impact on the level of pension benefits available. You may not get back the amount originally invested.
 
Levels and bases of relief from taxation are subject to change and their value depends on the individual circumstances of the investor.
 
The information contained in this leaflet is our understanding of current legislation, taxation law, HM Revenue and Customs’ practice, which are subject to change. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate on the date it is received or that it will continue to be accurate in the future.
 
We do not assume legal responsibility for any errors or omissions contained in this document.
 
The Financial Conduct Authority does not regulate taxation advice. Workplace Pensions are regulated by The Pensions Regulator.
 

ANNUAL HOLIDAY BOOKING RULES

1) Your annual holiday entitlement is shown in your individual Statement of Main Terms of Employment (Form SMT) and within MyBenefitsZone.

2) It is our policy to encourage you to take all of your holiday entitlement in the current holiday year. We do not permit holidays to be carried forward and no payment in lieu will be made in respect of untaken holidays other than in the event of termination of your employment.

3) We operate an online system for booking holidays within MyBenefitsZone. You will be given the rights to request annual leave online. We ask that prior to requesting annual leave you refer to the team calendar and consider the impact on the business if you are requesting a period of time where others have already had annual leave approved. We hope this process provides a simple facility to enable our colleagues to easily plan annual leave throughout the year.

4) Once you have registered your annual leave request online, you will receive an update via MyBenefitsZone from your appointed line manager approving or declining your request. If you feel that your request has been unreasonably refused for any reason you should refer the matter to your appointed line manager. He/she will endeavour to ensure that you have every opportunity to take your holidays at the time you requested, but he/she will need to balance your requests with the needs of the department/business.

5) You should give at least four weeks’ notice of your intention to take holidays of a week or more and one week’s notice is required for odd single days.

6) You may not normally take more than two working weeks consecutively without prior consent. Requests for longer period of time will be at the discretion of the Directors.

7) Your holiday pay will be at your normal basic pay unless shown otherwise on your Statement of Main Terms.

8) You are required to reserve sufficient days from your annual entitlement to cover the Christmas/New Year shut-down period. If you have not accrued sufficient holiday entitlement to cover this period you will be given unpaid leave of absence.

PUBLIC/BANK HOLIDAYS

Your entitlement to public/bank holidays is shown in your individual Statement of Main Terms of Employment.

Please note that, going forward, we will not approve any short notice annual leave requests unless there are extenuating circumstances to be considered.

If anybody would like any clarification on this, please do not hesitate to contact me.

Holiday Entitlement

To thank you for all your hard work, we want you to enjoy your time off, have some fun in the sun or spend time with your loved ones.

At Ernest Grant, as a full time employee you are eligible for additional days holiday accrual on the completion of each full years’ service for the first 5 years employment (calculated on a basis pro-rata for non-full time employees).

1) In your first year you will have 25 days holiday per annum

2) In your 2nd year you will have 26 days per annum

3) In your 3rd year you will have 27 days per annum and so on until you complete 5 years’ service at which point you will be entitled to 30 days per calendar year.

4) You can also purchase up to 5 extra days holiday each calendar year. The cost of these days would be spread over the remaining months of the year.

In addition, you can take all of the bank holidays and currently there are 8.

A) NOTIFICATION OF INCAPACITY FOR WORK

1)    You must notify us by telephone on the first day of incapacity at the earliest possible opportunity and by no later than 9.00 am. Text messages and e-mails are not an acceptable method of notification. Other than in exceptional circumstances notification should be made personally, to a Director.  In addition you will be required to log your absence on MyBenefitsZone.

2)    You should try to give some indication of your expected return date and notify us as soon as possible if this date changes. The notification procedures should be followed on each day of absence unless you are covered by a medical certificate.

3)    If your incapacity extends to more than seven days you are required to notify us of your continued incapacity once a week thereafter, unless otherwise agreed.

B) EVIDENCE OF INCAPACITY

1)    Medical certificates are not issued for short-term incapacity. In these cases of incapacity (up to and including seven calendar days) you must sign a self-certification absence form on your return to work.

2)    If your sickness has been (or you know that it will be) for longer than seven days (whether or not they are working days) you should see your doctor and make sure he/she gives you a medical certificate and forward this to us without delay. Subsequently you must supply us with consecutive medical certificates to cover the whole of your absence.

C) PAYMENTS

1)     Any contractual sickness/injury payments are shown in your individual Statement of Main Terms of Employment.

2)    You are entitled to statutory sick pay (SSP) if you are absent for four or more consecutive days because of sickness or injury provided you meet the statutory qualifying conditions. SSP is treated like wages and is subject to normal deductions.

3)    Qualifying days are the only days for which you are entitled to SSP. These days are normally your working days unless otherwise notified to you. The first three qualifying days of absence are waiting days for which SSP is not payable. Where a second or subsequent period of incapacity (of four days or more) occurs within 56 days of a previous period of incapacity, waiting days are not served again.

4)    Any days of contractual sickness/injury payments which qualify for SSP will be offset against SSP on a day-to-day basis. A deduction will be made for any other state benefits received if you are excluded or transferred from SSP.

5)    If you are entitled to any payments in excess of SSP and your entitlement expires, full or part payment may be allowed at our discretion where it is considered that there are special circumstances warranting it.

6)    Where the circumstances of your incapacity are such that you receive or are awarded any sum by way of compensation or damages in respect of the incapacity from a third party, then any payments which we may have made to you because of the absence (including SSP) shall be repaid by you to us up to an amount not exceeding the amount of the compensation or damages paid by the third party and up to, but not exceeding, any amount paid by us.

7)    The company reserves the right to withhold contractual sick pay.

D) RETURN TO WORK

1)    You should notify a Director as soon as you know on which day you will be returning to work, if this differs from a date of return previously notified.

2)    If you have been suffering from an infectious or contagious disease or illness such as rubella or hepatitis you must not report for work without clearance from your own doctor.

3)    On return to work after any period of sickness/injury absence (including absence covered by a medical certificate), you are also required to complete the absence section of MyBenefitsZone.

4)    Upon returning to work after any period of sickness/injury absence, you may be required to attend a “return to work” interview to discuss the state of your health and fitness for work. Information arising from such an interview will be treated with strictest confidence.

E) GENERAL

1)    Submission of a medical certificate or sickness self-certification absence form, although giving us the reason for your absence may not always be regarded by us as sufficient justification for accepting your absence. Sickness is just one of a number of reasons for absence and although it is understandable that if you are sick you may need time off, continual or repeated absence through sickness may not be acceptable to us.

2)    In deciding whether your absence is acceptable or not we will take into account the reasons and extent of all your absences, including any absence caused by sickness/injury. We cannot operate with an excessive level of absence as all absence, for whatever reason, reduces our efficiency.

3)    We will take a serious view if you take sickness/injury leave which is not genuine, and it will result in disciplinary action being taken.

4)    If we consider it necessary, we may ask your permission to contact your doctor and/or for you to be independently medically examined.