The term ‘salary sacrifice’ involves an employee giving up part of their gross salary in exchange for a non-cash benefit, resulting in a full or partial exemption from tax and/or national insurance contributions (NICs) and a NICs saving for the employer. The effect of the salary sacrifice is a change to terms and conditions of employment because the employee effectively gives up the right to the cash element of part of their salary.
Over recent years, some independent schools have introduced salary sacrifice schemes for the payment of school fees, whereby an agreed amount is deducted from gross salary and staff receive the non-cash benefit of a reduction in school fees payable.
Clearly, this can help to reduce the cost of an employee’s school fees, which acts as an attractive incentive to recruit and retain staff, enabling the school to remain competitive in the market, while also resulting in some cost savings for the school. It can be offered as a standalone benefit, or in conjunction with the benefit of reduced fees for employees. It can have the additional advantage of enabling schools to charge staff a higher percentage of fees without actually resulting in a higher net cost staff.
Despite the clear benefits to both the school and the employee, from a legal perspective, there are some points that schools should be aware of.
First, it is important to be aware that when an employee enters into a salary sacrifice scheme, it must constitute a variation to the terms of their employment contract and clear documentation to reflect this is needed, which sets out that the employee is giving up the right to part of their cash salary and will instead receive a non-cash benefit in its place. A document should be prepared setting out full details of the scheme and staff should be asked to sign to confirm acceptance to the change, either with a new contract of employment or a letter of variation. Documentation needs to clearly set out the ways in which the scheme can be terminated which accord with the strict HMRC rules.
One important implication of the salary sacrifice scheme is the effect it has when an employee goes off sick or on maternity, paternity, adoption or shared parental leave, when they may be receiving statutory payments. Using maternity leave as an example, during ordinary maternity leave, and (since 2008) additional maternity leave, an employee is entitled to continue to receive all of her benefits, except remuneration. Although there have been no test cases on this point, the general view is that the benefit received through a salary sacrifice scheme is a non-cash benefit rather than remuneration and should therefore continue to be provided during all of maternity leave. HMRC guidance provides that SMP (as well as other statutory payments) must be paid in full and cannot be sacrificed. The end result therefore is that the school must continue to provide the benefit but cannot deduct the cost of it from the employee’s statutory pay. This does therefore add a cost to the scheme. If a school pays enhanced maternity pay, this element can be subject to a deduction, provided the employee continues to receive at least the statutory element. The same applies in cases of other statutory payments, such as SSP.
Equally, the earnings for the purpose of calculating maternity pay should be the amount of salary actually paid to them, i.e. after the deduction for the non-cash benefit has been made which clearly has the effect of reducing the SMP payable.
Schools are able to offer the salary sacrifice only to certain categories of employee, for example teaching staff or senior leadership. It is, however, important that any limitation to the benefit is not discriminatory, for example offering it full time staff only. Clear parameters need to be included in the scheme wording so that there is no dispute over eligibility.
It is advisable to ensure the scheme is discretionary, enabling the school to terminate it at any time, although for it to be a successful scheme there does in most cases need to be some degree of permanence; HMRC guidance suggests a minimum period of 12 months, so an employee’s ability to withdraw from the scheme should be limited.
Due to the complexities of the legal and financial arrangements as well as the rules in ensuring the scheme is successful in accordance with HMRC guidance, specific legal and tax advice should be sought when implementing a scheme. However once set up it is fairly simple to administer and can be of great benefit to both parties.
Emilie Darwin is an employment law specialist working exclusively for schools at leading education law firm, Harrison Clark Rickerbys www.hcrlaw.com