As per HMRC guidelines, a salary sacrifice arrangement (salary exchange) is an agreement between an employer and an employee to change the terms of the employment contract to reduce the employee’s entitlement to cash pay. This sacrifice of cash entitlement is usually made in return for some form of non-cash benefit i.e. pension contributions etc.

If this happens, the employee gives up part of their salary and the employer pays this straight into the pension. In many cases the employer will take the amount that they save on employer’s NIC and pay this into the pension, thereby increasing the employee’s pension pot. 

Where salary sacrifice is being used, there will only be an employer’s contribution. The employee’s deduction is zero. Also, salary sacrifice cannot reduce an employee’s pay below the minimum wage.

Some AE schemes may not be able to accept salary sacrifice and it will be important to check with your proposed pension provider.

The following provides general guidance on how a salary sacrifice arrangement can be applied in BrightPay once an employee has been enrolled into a qualifying AE pension scheme:

Note: BrightPay now has a calculation method called % of gross for salary sacrifice. It lets you choose exactly which pay items the sacrifice is based on, and it can add the sacrificed amount to the employer pension contribution automatically. For most new arrangements we recommend this method. See Salary sacrifice deductions in BrightPay. The steps below still apply to existing arrangements and to the other calculation methods.
 

1) Within the Payroll utility, select the employee in question to access their payslip

2a) Under Pay and Benefits, enter the employee’s gross pay before salary sacrifice deduction




 

2b) Should the employee have additional pay items added to their payslip e.g. further additions and deductions, users can instruct whether these are to be taken into consideration or not when ascertaining the pensionable gross amount. Simply click the spanner symbol next to the amount in question and tick/ untick the pension options required.

3) Under ‘Additions and Deductions’, now click ‘Add’ and select the preset deduction 'Salary Sacrifice'


 

 4) Use the spanner to choose whether the pension deduction is calculated before or after the salary sacrifice deduction. If you use the % of gross for salary sacrifice method, you can also set this on the deduction type with the Deduct before employee pension and Deduct before employer pension options.

 

Please note: by clicking the 'spanner' button, users can also instruct the pension deduction to be calculated on the amount before or after the salary sacrifice deduction, as required. 

 

5) After enrolling the employee in the qualifying AE pension scheme, check how the employer contribution is being set. This depends on the scheme's Salary Sacrifice settings:


If the scheme is set to add salary sacrifice deductions to the employer contribution (for example, "Yes, all"), BrightPay adds the sacrificed amount to the employer contribution for you. It shows this as a separate line on the payslip. Nothing needs entering manually.

If the scheme is set to "No", or the employee is on an earlier setup, enter the employer contribution manually to match the agreement. You can use a percentage or a fixed amount.

In both cases the employee pension contribution must be zero, because only the employer pays into the pension under salary sacrifice.





 

Using the drop down menu, a fixed amount can also be entered for the employer contribution, as an alternative to entering a percentage:

Please note that any salary sacrifice arrangement for pension contributions must NOT reduce an employee's pay below the National Minimum Wage (or National Living Wage) applicable to their age. 

The Salary Sacrifice amount will show under the 'Deductions' section of the payslip:

Note: Salary Sacrifice amounts will not automatically appear on the Pensions report in the Analysis section. To add salary sacrifice to reports, when generating the report > go to 'Add/remove columns' > Employer Items > select 'Salary sacrifice' under Employer deductions. Run the report. To save these settings, click 'Save as template' once the report has been generated.

Salary sacrifice calculation method — controlling what is included

The calculation method sets which pay elements are used as the base for the sacrifice. There are five options:

• % of gross for salary sacrifice (recommended): the percentage applies only to pay items marked Contributes to gross for salary sacrifice. You can mark items for all employees under Employer > Hourly Rates, Daily Rates, Piece Rates or Additions. You can also mark them for one employee by clicking the spanner next to the item on their payslip. Statutory pay (such as SMP and SSP) and notional pay are always excluded. If no items are marked, the deduction will be £0.00.
• % of gross pay: BrightPay uses all pay elements, additions and deductions on the payslip. This includes items such as car benefit, commission or overtime.
• % of basic pay: uses only the elements in the Pay & Benefits section, and excludes other additions and deductions.
• % of AE qualifying earnings: applies the percentage to the pay elements that fall within the lower and upper qualifying earnings limits set in the pension scheme.
• Basic amount (£): you enter a fixed pound value. Use this if you need a figure that none of the percentage methods give.

To change the method on an existing deduction, click the spanner next to the salary sacrifice entry on the payslip and select the method you want. For a new deduction type, set the method under Employer > Deduction Types. For the full set-up steps, including the Treat as salary sacrifice tickbox, see Salary sacrifice deductions in BrightPay.

Please note: the "Contributes to gross for salary sacrifice" setting only affects deductions that use the % of gross for salary sacrifice method. It has no effect on the other four methods.