Salary Sacrifice - when less is more

In a rapidly changing employment market, in which bonuses have become a dirty word, employers will need to be flexible in their approach to rewarding staff.

Unlike bonuses, salary sacrifice arrangements (replacing part of the salary with other benefits), are not intended just to incentivise, they are as much about increasing the net package to staff and securing loyalty. If benefits produce tax savings, then this can be shared by both parties. The ‘belonging’ factor of some staff benefit schemes will help retain staff.

Typically salary sacrifice schemes can be used for such benefits as:

• Pensions
• Nursery vouchers
• Health insurance
• Dividend substitution (for shareholders)

It is likely that the ‘old favourite’ of pensions will make a comeback, as employees become increasingly worried about them. With compulsory employer’s contributions on the horizon, now is a good time to look at salary sacrifice for staff pensions.

There are some pitfalls for the employer in most schemes that need to be carefully considered. Where salaries may be reduced for maternity or sickness leave, many benefits cannot be reduced. Additionally, part- timers’ rights will come into the equation. Many benefits will be paid for by the employer on a longer term contractual basis than the staff notice period (ie health insurance may be an annual contract). Staff resigning will leave the employer with a cost that cannot be reduced in the same time scale. Administering salary sacrifice schemes can also be very time consuming.

This should all be taken into account in calculating their benefit, but there is benefit in most cases. The pro active employer who looks into the possibilities and keeps the solutions simple, will engender staff respect and loyalty.