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Salary sacrifice and statutory leave payments

Salary sacrifice schemes are a popular way to make tax savings. By changing the terms and conditions in an employment contract, an employee's salary can be reduced in return for certain non-cash benefits that may not be subject to tax or national insurance contributions.

Originally such schemes dealt with waiving an employee's right to a cash bonus in return for pension contributions, but now they are much more widely applied and could be used for childcare vouchers, company cars, gym membership, bicycle purchase, and medical insurance among other benefits.

While some salary sacrifice arrangements could enable employees to save thousands of pounds a year in tax and NIC payments, it's important to get good advice before changing an employment contract.

Salary sacrifice can have a negative impact on some statutory payments, such as maternity, paternity, adoption or sick pay. That's because for them the level of pay is calculated on average weekly earnings during a certain period. As sacrificed earnings don't count towards this, statutory payments could be substantially reduced or cold not be payable at all.

Going on parental leave does not affect an employer's obligation to provide non-cash benefits associated with a salary sacrifice scheme. This is true even if the employee is not sacrificing salary while on leave - unless some kind of voluntary opt-out has been agreed for the leave period.

But opting out of a salary sacrifice scheme at some time from the start of the average weekly earnings qualifying period is not enough on its own to ensure increased statutory payments. In legislation, a recalculation of statutory maternity pay can only happen when a pay rise has been awarded. Reverting back to an old salary level is not deemed to constitute a pay rise in this instance.

Acas can visit your organisation and help you iron out a range of issues related to pay and reward. Acas also runs courses on Contracts and terms and conditions, including how to vary a contract of employment. Visit Pay and reward: how Acas can help in the Acas Training and Business Solutions page for more information.

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