SALARY SACRIFICE SCHEMES
NUT GUIDANCE
From 1 June 2006, all teachers will be able to take part in “salary sacrifice”
schemes offered by their employers. These schemes allow employees to obtain
certain kinds of benefit - in particular childcare vouchers - on a tax-free basis in
return for surrendering part of their pay. This briefing note explains how “salary
sacrifice” schemes operate and advises on the implications for NUT members
considering whether to take part.
WHAT ARE “SALARY SACRIFICE” SCHEMES?
1.
Salary sacrifice schemes allow employees to take advantage of tax exemptions
for the costs of certain kinds of non-cash benefits provided by their employers.
2.
The employer enters into an individual contractual agreement with each
employee taking part in the scheme. The employees agree to give up part of
their gross pay and the employer agrees to provide in return non-cash benefits to
the same value. The employees then receive these non-cash benefits free from
income tax and National Insurance contributions which they would otherwise
have paid on those amounts of gross pay.
3.
From April 2006, the exemption from income tax and National Insurance (NI)
contributions applies to schemes providing Childcare Vouchers or other
childcare benefits, schemes providing cycles or cyclists’ safety equipment
for travel to and from work and schemes permitting the purchase of mobile
phones from employers. The exemption for home computers purchased from
employers was ended by the 2006 Budget.
4.
The exemption from income tax and NI contributions currently applies to the first
£55 in value per week of the benefits. The exemptions significantly reduce the
cost of such benefits to employees in comparison to the cost of buying such
benefits from take-home pay after tax. Employees could, for example, obtain £55
in childcare vouchers in return for giving up £55 in gross pay which might
otherwise have amounted to only some £35-40 in take-home pay after income
tax and NI contributions.
5.
The exemptions apply to benefits provided by employers in addition to pay, for
example as recruitment or retention incentives for teachers. They apply also to
benefits provided in place of pay under salary sacrifice arrangements.
6.
At www.hmrc.gov.uk/specialist/salary_sacrifice.pdf you can find detailed Inland
Revenue on salary sacrifice schemes. Advice should also be available from any
employers operating salary sacrifice arrangements for their employees.
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TEACHERS AND SALARY SACRIFICE
7.
From 1 June 2006, all NUT members will be able to take part in salary sacrifice
schemes and take advantage of the income tax and NI exemption.
8.
Teachers employed in local authority maintained schools will become entitled to
take part in salary sacrifice schemes run by local authorities with effect from 1
June 2006. Previously, many authorities had excluded such teachers from their
schemes on the basis of DfES advice that employers were statutorily required to
pay such teachers their full pay entitlements irrespective of any salary sacrifice
agreement. The NUT made representations to DfES Ministers in summer 2005
and again in autumn 2005 asking for the law to be changed to allow such
teachers to take part in local authorities’ salary sacrifice schemes. The NUT is
pleased to report that its representations were successful and that the necessary
amendments to the teachers’ pay structure have been made to allow this.
9.
Other NUT members have previously been entitled to take part in salary sacrifice
arrangements offered by their employers. They include:
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10.
NUT members employed on Soulbury terms and conditions;
supply teachers working in local authority maintained schools who are
employed via supply agencies;
teachers in local authority maintained residential social services
establishments employed on JNCTRE terms and conditions - but not
teachers in local authority maintained residential special schools;
teachers in sixth form colleges.
teachers in Academies ,including those paid in line with the STPCD; and
teachers in CTCs and independent schools.
Employers must agree to set up salary sacrifice schemes before their employees
can take part. If your employer does not currently operate a salary sacrifice
scheme, contact your local NUT division or association for advice and
assistance.
IMPLICATIONS FOR PENSIONS AND BENEFITS
11.
The NUT has persuaded the DfES to change the rules of the Teachers’
Pensions Scheme (TPS) to ensure that salary sacrifice arrangements do not
affect TPS members’ pension entitlements. Other NUT members considering
taking part in salary sacrifice arrangements should, however, be aware of the
possible implications for their pensions.
12.
Most pension schemes provide that the rate of pay used to calculate
contributions and pension entitlements excludes pay surrendered under salary
sacrifice schemes. The pay rate used to calculate pension entitlements in such
cases is the pay rate net of the salary sacrifice element. Salary sacrifice
arrangements could, therefore, affect employees’ pension entitlements in such
cases if they retired, including retirement on ill-health grounds, or died in service
within three years of the ending of any such arrangements.
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13.
The DfES has announced its intention to amend the rules of the TPS later in
2006 in order to make clear that where salary is sacrificed, the sacrificed portion
of pay will count as pensionable.
14.
NUT members who are members of other pension schemes such as the Local
Government Pension Scheme should seek advice on this issue from their
employers or pension scheme administrators.
15.
NUT members should also be aware of possible implications for entitlement to
other benefits including contributory or earnings related benefits such as:
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16.
statutory sick pay, statutory maternity pay, maternity allowance and
incapacity benefit; and
tax credits such as Working Tax Credit and Child Tax Credit.
It is unlikely that any NUT members would be affected by these implications for
other benefits, unless they were working on a part time basis for a rate of pay
close to the NI Lower Earnings Limit. NUT members should nevertheless seek
appropriate advice from the employer or other expert source.
REGISTERING AN INTEREST IN SALARY SACRIFICE
17.
The DfES has provided brief guidance on this area, including a model form for
teachers to register an interest in taking part in salary sacrifice schemes, via the
Teachernet website at www.teachernet.gov.uk/docbank/index.cfm?id=9792
18.
As noted earlier, NUT members employed in LEA maintained schools should
contact their NUT division or association with regard to the availability of salary
sacrifice schemes in their area.
NUT Salaries Dept
May 2006