Salary sacrifice dangers outlined by consultants

There are significant financial advantages to implementing salary sacrifice schemes, but companies need to consider the potential pitfalls, experts have warned.

Salary sacrifice involves employees giving up part of their taxable pay in exchange for a non-cash benefit – typically additional pension contributions – to gain from tax and/or National Insurance (NI) contribution savings.

For example, employers can achieve savings of up to 12.8% on employee NI contributions via salary sacrifice.

But while the benefits are considerable, so are the risks of getting it wrong, warned Morag Prosser, senior consultant flexible practice at business consultancy Watson Wyatt.

She said that companies need to be acutely aware of those groups who could be adversely affected by salary sacrifice – those close to retirement, those on or near the minimum wage, those close to the maximum benefit and those on statuary pay.

“Getting the structure right is crucial,” Prosser said. “Reduced basic salary could also impact on bonus, overtime, life insurance and salary increments so defining the salary these are based on is crucial.

“Communication is also vital,” she added. “Salary sacrifice can be a win-win situation for employer and employee, but employees need to feel informed of and involved in the decision-making process. Transparency as well as the ability to opt out are essential.”

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