Paul Tooth, General Manager at Sage HR & Payroll, examines why salary sacrifice should be part of an organisation’s armoury and explores the key considerations firms should make before implementing a scheme.

In 2012 salary sacrifice will force itself up the corporate agenda. According to CIPP (Chartered Institute of Payroll Professionals) companies are likely to see a rise in salary sacrifice from September as employees seek ways to get round the increase in tuition fees. With many people already struggling with the rising living costs at a time when salaries are frozen, employees are demanding more support from their employers. It comes as no surprise then that interest in salary sacrifice has increased significantly. However, it’s imperative that before implementing such schemes, businesses do their due diligence to ensure they, and their employees are best placed to reap the full benefits.

Going back to basics: how earning less can give more

Schemes that give employees the opportunity to forego some of their salary in return for other - often more tempting - non cash benefits, significantly reduces the tax liability for organisations and their employees. By paying for these benefits out of their gross salary, an employee can reduce their liability to income tax and National Insurance. Moreover, the employer will benefit through cutting its National Insurance responsibility and can then re-invest savings into other schemes or absorb it back into the company’s P&L.

Tax relief?

Salary sacrifice initiatives provide a route to boost savings that offer considerable benefits in periods of economic instability for employees. Indeed, by entering into a salary sacrifice arrangement that could keep earnings under £100,000, high earning employees will not only significantly reduce their personal tax liability, but can also protect some of their £6,475 personal allowances if they hit “the sweet spot” (earning between £100,000 and £112,950).

Nevertheless, while sacrificing salary can unquestionably form part of an effective tax planning strategy, the benefits of salary sacrifice do not extend to everyone, nor will they apply to those earning over £150,000 per annum. This clearly reiterates the need for employers to be vigilant in ensuring any salary sacrifice arrangement is fully compliant with HMRC guidelines and beneficial for both the organisation and its people.

Moving beyond financial gain

The tax savings offered through salary sacrifice are indisputable, yet the benefits are more than just financial. These schemes are also an effective way of improving morale amongst your workforce as they show the business cares about its employees’ remuneration. Employers need to invest time to educate their people on the benefits and drawbacks associated with salary sacrifice. Not only can this help to drive employee uptake by helping to show how the business has invested in its people, but also gives employees the flexibility to select those tax breaks that will benefit them long-term.

Finally, businesses should also look to invest in payroll software that takes care of PAYE regulation and can accurately track what has been paid against what has been saved. This means firms can track a running total of the tax savings made, and also benefit from administration and calculation efficiencies that will reduce the burden on payroll.