Why use a salary sacrifice mechanism for childcare vouchers

 

Why Sacrifice Your Salary for Childcare Vouchers

Often when employers start to promote salary sacrifice benefits, many employees fear the worst. They mistakenly suspect that this is just a way for employers to cut costs. However, this is not necessarily the case. In the case of childcare voucher schemes nothing could be further from the truth. Salary sacrifice in both childcare voucher schemes and employer childcare voucher schemes can be beneficial for both employers and employees.

Childcare voucher schemes were introduced by the government and allow employees to give up or ‘sacrifice’ part of their pay in exchange for childcare vouchers. These vouchers are for use in any number of the various childcare voucher schemes available today. Any employee sacrificing part of their salary in this way will receive the same amount back in childcare vouchers, but with the added bonus that they won’t have to pay tax or national insurance on this amount. In effect this means that for every £700 they ‘sacrifice’ in terms of salary, they will receive back the equivalent of £1,000 after the tax and insurance benefits are added into the calculation.

How are salary sacrifice schemes advantageous?

The advantage stems from the fact that because the employee’s salary is lower, the NI contributions paid by both employee and employer are reduced. In fact, this reduction in NI payments is one of the main reasons for introducing salary sacrifice schemes in the workplace. It’s no coincidence that they have become increasingly popular since the national insurance rate rose earlier this year. Salary sacrifice schemes can also save employers the equivalent of £402 per employee each year as they do not have to pay NI contributions for employees joining such a scheme. However the position is neutral where income tax is concerned because although the employee’s salary may be lower, they don’t get tax relief on the pension contribution concerned.

Are there any potential disadvantages to salary sacrifice childcare voucher schemes?

By accepting a reduction in salary employees could inadvertently affect their state pension entitlement. The entitlement to the basic state pension depends on a number of factors, including the number of “qualifying years” - in other words, those years where they have been earning above the lower earnings limit for NI purposes, currently £102 per week. So they should take great care about whether to take part in a salary sacrifice scheme. By reducing their salary below the lower earnings limit, they might potentially prejudice their basic state pension entitlement.

Employees should also think about it carefully if they have pay into a state second pension, the additional component of the state pension which was introduced in 2003. An individual’s entitlement to the state second pension does not depend on having a minimum number of qualifying years, but rather on each year that they pay NI contributions on earnings above the lower earnings limit. Again, care should be taken to ensure that salary sacrifice arrangement would not take their earnings below that figure to the detriment of their state second pension entitlement.

Entitlement to other benefits may be affected by salary sacrifice. For example, statutory sick pay is provided for employees who satisfy certain requirements, one of which is that their earnings over the eight week period prior to illness must have been at or above the lower earnings limit.

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