Salary sacrifice involves a change to an employee’s contract of employment. When you set up a salary sacrifice arrangement your existing employees will need to agree to this.
You can set up your salary sacrifice arrangement so employees can opt in or out, agreeing the change to their contract of employment each time, if there’s a significant change to their lifestyle affecting their financial situation (such as marriage, divorce or bereavement).
Remember, salary sacrifice is covered by employment law, not tax or pension law. You may need to take specialist advice if you’re changing employment contracts.
Safeguards for employees
You’ll need to make sure employees are aware of the fact that salary sacrifice could affect their entitlement to the following types of State benefits.
- Earnings-related benefits, including means-tested benefits and statutory benefits such as sick pay. Employees could qualify for a reduced benefit, or even lose the benefit altogether if their earnings go below the government’s lower earnings limit because of salary sacrifice.
- Contribution-based benefits such as State Pension. Employees will be paying lower National Insurance contributions, so could build up a lower amount of State Pension.
You may consider not including some employees in your salary sacrifice arrangement if it would make them worse off financially.
You can’t include employees in a salary sacrifice arrangement if it would take their earnings below the National Minimum Wage. You’ll need to have a system in place for checking this.