Her Majesty’s Revenue & Customs has updated its guidance in relation to Salary Sacrifice arrangements. The key change is that it no longer stipulates that such arrangements need be for a minimum 12 month period. The consequence of this change is that the parties are free to agree to opt in and out of Salary Sacrifice as they wish.

The main motivation behind this change is to allow Salary Sacrifice to dovetail with the new automatic enrolment requirements.

This may be seen as a vast improvement by some employers who do not want the hassle of issuing new agreements each year to those wishing to use the facility.  

However, allowing the employee to opt in and out several times a year may create an administrative burden. Those employers who decide not to apply a minimum term may experience a much higher degree of opt-outs. This is something which each employer is best placed to assess – different workforces may be more prone to opting-out than others.

Employers could consider withholding access to the Salary Sacrifice arrangement for any employee who they feel is dipping in and out of the arrangement too frequently. However, this approach is not without risk as it may leave the employer open to claims from any aggrieved employees who are barred from participating in the Salary Sacrifice arrangement.

Whilst a minimum time period is no longer a requirement, employers can still choose to impose a minimum time period.  

If time limits are to be retained it would also be appropriate to continue to permit an exemption in respect of certain lifestyle changes. This will help the employer to manage the situation where an employee wishes to exit the arrangement early for a genuine and appropriate reason.  

The best approach depends on the employer’s objective regarding Salary Sacrifice. If it wants as many employees as possible to sign-up to Salary Sacrifice (i.e. because of the National Insurance Contribution savings) then perhaps it would be better not to impose a minimum time period, as the minimum time period may discourage certain employees from signing-up to Salary Sacrifice.

Employers should now consider whether they wish to alter their procedure in relation to Salary Sacrifice to take advantage of the new relaxation. Salary sacrifice agreements will need to be reviewed with our legal assistance as appropriate. The employer will also need to consider the impact on its pensions auto-enrolment arrangements as it cannot be a condition of pension scheme membership under auto-enrolment that the member takes up the Salary Sacrifice facility.