Why would you use a term like ‘sacrifice’ to describe a benefit that provides a pot of gold to both employer and employee? Alan Marshall, MD of Global HR Consultants explains how a salary sacrifice scheme can increase net pay and reduce employer costs.

Author: Alan Marshall, managing director, Global HR Consultants 

OVERVIEW

One of the main items to address is the image created by the word 'sacrifice' and how the term relates to pension contributions. 
 
WHEN TO USE THIS GUIDE

Would you like to:

• Increase employees net pay while reducing employer costs

• Introduce an employee retention tool that really does produce a win-win result

• Stay in touch with, and maybe get in front of, your competition

10-STEP ACTION PLAN
 
1. Do you know what salary sacrifice is?

The first step is to understand what is available to you and if this type of employee benefit and employer cost reduction would be of interest to your organisation.

• Salary sacrifice is a method of converting a traditional deduction from pay into a tax effective reduction of gross pay.

• The net effect on the employee is an increase in net pay. 
 
• The net result for the employer is a reduction in costs.

So where's the sacrifice?

2. Sacrifice is all about the change in employment contract

• The employee give ups the right to receive part of the cash pay due under the contract of employment.

• In return the employer provides the employee with an equivalent benefit (in this case it is the pension contribution).

• This means the employee is in exactly the same financial position overall but the gross pay has been reduced and therefore the resulting national insurance contribution will go down (for both parties) and this is the saving.

• But be careful, Salary Sacrifice is a matter of employment law and not tax law so it is vital to use an employment lawyer to ensure you get the change of contract right.

• The employee must agree to give up their contractual right to make this work.

3. Three ways of varying the contract

a) By rewriting the whole document and gaining employee agreement/signature.

b) By setting out the agreed changes in a separate document that is attached to the original contract and gaining employee agreement/signature.

c) By informing employees of the proposal to make the changes.

• The employer may specify that if an employee has not indicated his/her wish not to participate in the changes by a certain date, the absence of an 'opt out' will be regarded as an 'opt in'.

This approach is often used when wholesale changes to all employees’ terms and conditions are proposed such as with a pension scheme.

The third option above is effective if employees:

• have been fully informed of the proposals
• are given a specified date by which time the 'opt out' must be made
• continue working after the opt out date
• continue working after the first pay-day when the changes have been implemented without protest

When these conditions have been satisfied, the employees have indicated their agreement to the variation by their conduct and the revised agreement is binding.

4. Your salary sacrifice scheme will be subject to an agreement

Between the HMRC and your organisation so ensure all your fine print clearly shows that this takes precedence over all other agreements and arrangements with employees.

Other considerations:

• Check out your workforce demographics as any employees on low pay may cause issues if you were to threaten the national minimum wage

• Also investigate the effect on Statutory Benefits such as Maternity and Adoption pay or any other benefits determined by national insurance contributions

5. Down to the communication process - do you have a strategy?

• Will you share some/all of the employer savings
• Do you have trade unionists that will see a negotiating opportunity
• One strategy is to use the savings to fund the implementation
• Should you survey the workforce to assess interest level i.e. is it worth it
• Is there a clear ROI (return on investment) however you choose to value that return
• Timing of the implementation may be important to your organisation.
• Lead times for any new software implementation will be important.

6. Engaging your staff is key

You need to use a marketing approach:

• Creating the right image is important
• Email, briefings, intranet, posters, brochures, notice boards, newsletters, roadshows, awareness day, Q&A page on your website
• Electing and training company champions, someone staff know and trust
• Provide a helpdesk for ongoing questions

7. What will you call it?

Salary sacrifice? But where’s the sacrifice if everybody wins?

• What image does this name portray
• The employee sacrificing something...but is this true
• You probably want to introduce this to make improvements for your employees – will this name help send that message
• Selling this concept is therefore important so you must use that marketing approach to get maximum employee buy-in

How about flexible benefits?

• What image does this name portray
• More positive – sounds like the employee has a choice
• Other names used …. Choices, Salary Exchange, Flex, Free2U, Beneflex, FlexBen, FlexSA, Flexchange.

What will you call yours?

8. Creating the image and illustrating the benefits

• When you decide on your marketing strategy think about a logo that employees can easily recognise and relate to. They will soon learn that this logo means a benefit for them, and be attracted to it, as you introduce new items.

• Do 'before and after' sample pay statements using familiar stationery and using your pay statement terminology and rates of pay so that employees can see how it will affect them financially.

9. Launching the scheme and keeping it 'evergreen'

• Once the scheme is launched you should continually review, say on an annual basis, to ensure you are still achieving the desired results.

• Introduce new benefits and withdraw those no longer effective.

• Large organisations offer many benefits, some are tax efficient while others offer attractive discounting. All these help with staff retention mentioned earlier. Some examples are:

• Childcare, charitable giving, gyms, carbon footprint, holidays, bikes, shop until you drop, wine club, mobile phones, private medical insurance, health screening, dental insurance, critical illness insurance, magazines, health cash plan, spouse/partner life assurance.

10. Illustrating the benefits

A large retail organisation produces a personalised booklet showing:

• Pay, salary sacrifice pension, shares, staff discount.
• The final total £ shows the real value of all pay and benefits and helps reinforce the 'retain' concept mentioned earlier.

Other benefits promoted in this booklet:

• SAYE, BAYE, privilege card, long service and retirement awards, childcare, flexible working policies, holidays, gyms & leisure centres, laser eye treatment, dental cover, car insurance.

EXPECTED OUTCOMES | RESULTS
 
• Increase in employee net pay

• Reduction in employer costs

• Enables improved staff retention

ABOUT GLOBAL HR CONSULTANTS

Global HR Consultants is a pan-European company providing a global service in the area of HR administration.

Global HR Consultants can assist you in a variety of ways from creating cost effective and competitive people-friendly policies to searching and selecting software solutions for a variety of HR administration applications. In addition, creative training services are available to provide your staff with the skills required to ensure your greatest assets are protected.

FOR MORE INFORMATION

Global HR Consultants
Contact: Alan Marshall
T: 01325 339058
E:: enquiries@globalhrc.co.uk
www.globalhrc.co.uk
www.expatexpert.co.uk