In salary sacrifice, a person exchanges their pay in return for their employer paying for a benefit, such as a pension contribution. This reduces the employee’s take-home pay but can also lower taxable income, leading to potential tax and National Insurance savings. However, because salary sacrifice reduces gross salary, it can impact other pay-related benefits, such as statutory maternity pay or life insurance, which are calculated based on the employee’s gross pay.
In this article we will explain in detail how salary sacrifice can affect the following statutory benefits.
What's in this blog?
Types of government benefits
Government benefits, also known as statutory benefits, come in 3 forms:
- Earnings related benefits
- Statutory sick pay
- Contribution based benefits
The affect of salary sacrifice on statutory benefits
1. Earnings related benefits
Earnings related benefits include any of the following:
- Maternity Allowance (up to 39 weeks of pay)
- Shared Parental Pay (up to 37 weeks of pay)
- Maternity Pay/Paternity Pay (up to 39 weeks of pay)
- Adoption Pay (up to 39 weeks of pay)
- Parental Bereavement Pay (up to 2 weeks of pay)
- Redundancy Pay (up to 20 weeks of pay)
Maternity allowance
Critical point
Some or all of the benefit due is based on the following calculation: an employee will either get £172.48 or 90% of their average weekly earnings (whichever is lower) (2023/4 Gov.uk).
Who this would affect
Anyone earning between £6,240 and £8,691 would have their statutory pay calculated based on their average earnings, rather than a flat rate of £172.48 per week. Since salary sacrifice lowers an employee’s average earnings, those earning under £8,691 who participate in salary sacrifice would receive 90% of their post-sacrifice pay during qualifying periods.
Example: A person earning £8,000 participates in salary sacrifice and sacrifices 5% of their full salary (£400), taking their pay to £7,600. This person would get 90% of £7,600 for 39 weeks of maternity allowance or parental pay rather than 90% of £8,000, a loss of £270.
Shared Parental/Maternity Pay/Paternity Pay/Parental Bereavement Pay/Adoption Pay
Critical point
The amount paid for up to 6 weeks is 90% of your employees’ salary. For the remaining weeks, if applicable, an employee will either get £172.48 or 90% of their average weekly earnings (whichever is lower) (Gov.uk).
Who this would affect
Those who are in the salary sacrifice scheme during the qualifying weeks would receive statutory pay based on the post-sacrifice level of their salary, which would be lower than if they were not in the salary sacrifice scheme.
Example: A person earning £45,000 participates in salary sacrifice and sacrifices 5% of their full salary (£2,250), taking their pay to £43,062. This person would get 90% of £42,750 for 6 weeks rather than 90% of £45,000, a loss of £234.
There are pros and cons of remaining in salary sacrifice when it comes to parental related benefits. While the average pay may be reduced, it’s also possible to benefit from higher pension contributions. For a detailed examination of parental pay and salary sacrifice read this article.
Redundancy Pay
Critical point
The amount a person receives is a ratio, dependent on their age and on their average weekly pay in the 12 weeks before the day they receive notice of redundancy (Gov.uk). Redundancy pay is capped at £632 (£669 in Northern Ireland) per week.
Who this would affect
Anyone on a salary of £32,864 or less (pre-sacrifice) who was made redundant and had participated in the salary sacrifice scheme in the 12 weeks before the day they receive the redundancy notice.
Example: A person earns £25,000 per year, or £481 per week. They participate in salary sacrifice and sacrifice 5% of their full salary (£1,250). This takes their pay to £23,750 or £457 per week.
Because this person is over 62 years old, they would be entitled to redundancy pay at a ratio of 1.5 weeks’ pay for each year they were aged 41 or over. Assuming they had worked at the firm for 20 full years, they would receive £13,710 in redundancy pay (£457×150% x 20) instead of £14,430 (£481×150%x20).
2. Statutory Sick Pay
Critical point
Only those earning an average of at least £123 per week will be eligible for statutory Sick Pay (2023/4 Gov.uk).
Who this would affect
Anyone whose earnings were reduced below £6,396 as a result of participating in salary sacrifice would be affected.
Example: A person earns £6,500 per year. They participate in salary sacrifice and sacrifice 5% of their full salary (£325). This takes their pay to £6,175 equivalent to an average weekly earning of £119. They would no longer be eligible for statutory sick pay.
3. Contribution based benefits
- Employment and Support Allowance
- Job Seeker’s Allowance
- State Pension
Employment and Support Allowance/Job Seeker’s Allowance/State Pension
Critical point
A person must earn over £6,396 to earn a qualifying year for the state pension (2023/4 Gov.uk), and must have earned over this amount for one to two years prior to claiming Job Seeker’s Allowance or Employment and Support Allowance.
Who would this affect
Anyone who participated in salary sacrifice and, in doing so, took their earnings under £6,396 would stop paying National Insurance. Such a person would cease to earn qualifying years for the State Pension, and may not be eligible to claim for Job Seeker’s Allowance.
Example: A person earns £6,500 per year. They participate in salary sacrifice and sacrifice 5% of their full salary (£325). This takes their pay to £6,175. They would cease making National Insurance contributions.
Top considerations for employers
NI thresholds
- An employer will only pay National Insurance when employees earn at least £758 per month or £9,096 per annum (2023/4 Gov.uk). Therefore, the employer will make no NI savings from employees earning under this amount taking part in salary sacrifice.
- Similarly, an employee will only pay National Insurance when they earn at least £242 per week or £12,576 per annum. Therefore, those earning under this amount will not make any NI gains from participating in salary sacrifice.
Auto-enrolment
- Most people earning under £10,000 will be unaffected by salary sacrifice, because auto enrolment is triggered when an employee earns at least £10,00 per annum (2023/4 Gov.uk).
- There are some employers, however, who choose to put all employees into the pension, and of course employees earning under £10,000 could be affected by salary sacrifice if they opted into or joined the pension.
National Minimum Wage requirements
- Employers must ensure that their employees never earn below the National Minimum Wage of £10.42 (2023/4 Gov.uk, rising to £11.44 from April 2024).
Compulsory opt out
- There may be situations where employers run a ‘compulsory opt out scheme’ where employees are automatically put into a scheme unless they opt out. In this case, employees who did not opt out of salary sacrifice could be negatively affected if they fall into the categories mentioned above. Employers must make sure employees are educated about the impact of salary sacrifice and have the chance to opt out if needed.
Income tax relief
- If an employer offers a relief at source scheme, employees who earn under the personal tax-free allowance of £12,570 (2023/4 Gov.uk) get tax relief on contributions, even if they are not taxpayers. So, for every pound an employee puts into the pension, they get £0.20 or 20% of that given to them by the government. This is a better deal for an employee who is not a taxpayer than being in a salary sacrifice scheme. Salary sacrifice provides a different tax break that is only worth 10% to the employee.
Simple rules to follow
Make sure your salary sacrifice scheme is in the best interests of your staff. Here are 4 simple rules to follow:
- If you operate a relief at source scheme, do not put anyone into salary sacrifice who earns less than the personal tax-free allowance.
- If you operate a net-pay arrangement, do not put anyone earning less than £10,000 into salary sacrifice.
- Alongside applying rules 1 or 2, if you have hourly waged employees, only put those who earn at least 6% more than the National Minimum Wage into salary sacrifice (assuming an employee pension contribution rate of 5%).
- Inform employees about the ability to opt out of salary sacrifice if they have a change of circumstances such as having a baby or if they intend to claim benefits such as Employment and Support Allowance which might be affected by salary sacrifice. (Note that parental benefits and maternity allowance are complex areas and we suggest you read this article on the topic).
This article is based on our current understanding of the benefits system. Please get advice from a benefit consultant if you are unsure of anything.
