Salary sacrifice and tax-free childcare

What is a salary sacrifice arrangement?

A salary sacrifice arrangement is an agreement between an employer and an employee where the employee gives up some of their contractual entitlement to cash earnings in return for non-cash benefits. Examples of this include:

* No longer attract tax and national insurance benefits.

More detailed information on salary sacrifice arrangements can be found on the HMRC website.

Cycle to Work scheme

The NHS People Plan outlines that organisations should support staff to use other modes of transport, rather than traveling by bus or train. Hospitals should identify a cycle to work scheme lead so that more staff can make use of this option. You can also view our reward page which includes tools and resources to support your organisations approach to reward.

Impact of the national living wage

Salary sacrifice schemes have the potential to reduce staff earnings to below the appropriate minimum income. If you pay your staff less than the national minimum wage, or national living wage for employees over the age of 25, you must make up any shortfall. You may be fined up to £20,000 by HMRC for each non-compliant employee.

We recommend that employers operating salary sacrifice arrangements should review them to ensure compliance with the minimum income requirements. It is good practice for employers to continue to monitor their salary sacrifice arrangements on an ongoing basis, and in particular; when an employee joins a salary sacrifice arrangement for the first time; when a new salary sacrifice scheme is introduced; each April when the national living wage rates are reviewed; and each October when the national minimum wage rates are reviewed. The current national living wage and nation minimum wage rates are available on the GOV.UK website.

Implications for members of the NHS Pension Schemes

There are some specific implications of entering into a salary sacrifice arrangement for members of the NHS Pension Schemes.

Forgoing a cash benefit for a non-cash benefit reduces the amount of take home pay. In a career average revalued earnings (CARE) pension scheme, like the 2015 Scheme, pension benefits are built up on a year by year basis. Employers should ensure that their salary sacrifice communications clearly explain the impact on employees pension contributions. Any change to a members salary in each year (such as salary sacrifice), will have an impact on the individuals gross pensionable pay.

Entering into a salary sacrifice arrangement that reduces gross pensionable pay will mean that reduced benefits are built up for that period.

In a final salary pension scheme, such as the 1995/2008 Scheme, salary sacrifice will not have an impact on the value of the individual's pension benefits if the member opts out of the salary sacrifice arrangement before retirement. However, please note a large increase in pensionable pay before retirement may result in an employer charge under a final pay control. 

Employer considerations

Employers may consider a number of factors before making salary sacrifice arrangements available, including:

• financial considerations such as cost, cost neutrality, or savings
• administration and communication resources
• reward, recruitment, and retention strategies and how this fits with the overall approach to reward
• legislation, governance, and compliance with tax rules
• whether you need to update your policies and procedures
• what your workforce want, and how this differs between demographics.

Employee considerations

There are number of things that employees may consider before entering into a salary sacrifice arrangement, including:

• cost of the arrangement
• how the arrangement compares with what the individual could buy themselves
• potential savings
• impact on future pension if they are a member of a defined benefit scheme, such as the NHS Pension Scheme
• how vital the arrangement is to the individual being able to work, such as childcare vouchers.

Tax-free childcare

The government tax-free childcare (TFC) scheme was introduced on 28 April 2017 and will eventually replace employer-supported childcare schemes (ESC). We have put together key information on TFC for employers including how this affects employees in any current ESC schemes you operate.

Key facts about TFC

• TFC is administered through online accounts, opened by parents on the GOV.UK website. Parents pay money into the account, which is used to pay for childcare with registered providers.
  Parents can pay money into their childcare account as and when they like, and other parties can also pay in.
• For every £8 paid in, the government will add £2, up to a maximum of £2,000 government support per child, per year (£4,000 for children with disabilities).
• The scheme is open to parents of children up to and including the age of 11 (16 for children with disabilities). This is lower than current ESC which is available for children up to 15 years of age.

The role of employers in TFC

There is no mandated role for employers under TFC, but you may choose to provide information to your employees. This will be a predominantly signposting role, directing employees to the childcare account website and where to register. Employers will not be required to verify identification or eligibility.

Parents can choose to remain in their existing ESC arrangement or move to TFC. This decision will depend on which option is best for the parents' individual circumstances. You may wish to direct your employees to the childcare calculator to help with making this decision.

Childcare vouchers can play a valuable part of an employer's total reward offering and are used for recruitment and retention purposes. As they are being phased out, you may need to review your flexible working offering and consider what else you could to support working parents and ensure your total reward offering is still family friendly. You may wish to consider introducing other family friendly benefits into your organisation and you will need to look at the cost implications of offering these. One option may be choosing to pay in to an employee's TFC account, either as an additional payment, or by facilitating payments from their salary. Remember though that any contribution towards TFC from an employee's salary must be from net earnings, i.e. after tax, to avoid them receiving a tax benefit twice.

Employer-supported childcare (ESC)

Employers in the NHS can currently provide ESC through schemes such as childcare vouchers, workplace nurseries and directly contracted childcare.

Workplace nurseries

Employers providing workplace nurseries and directly contracted childcare can continue to do so, and employees will still be able to join a workplace nursery scheme offered by their employer. Given that more employees will be using TFC to pay for their childcare provider, this may impact how your workplace nursery is funded.

Childcare vouchers

Employers offering childcare vouchers through salary sacrifice arrangements can no longer accept new entrants to a scheme. Employees who registered for childcare vouchers through their employer before 4 October 2018 can continue to use the scheme as long as the employer continues to offer it and their child remains eligible. Employees are continuing members of a scheme provided they do not have more than 52 consecutive weeks without receiving childcare vouchers.

If an employer received new employees after 4 October 2018 under a business transfer covered by Transfer of Undertakings (Protection of Employment) rules, these employees were entitled to retain their terms and conditions; if they were in a childcare voucher - or directly-contracted childcare - scheme before the transfer, they can join your existing scheme, or a new one can be started.

The government tax-free childcare scheme may be available to parents and you can find out more information on the GOV.UK website.

Further information

You can find out more about tax-free childcare on the GOV.UK website and on the Childcare Choices government website.