Salary sacrifice for grocery schemes

As a voice for unrepresented taxpayers, it is very important we are always gathering insight and information directly from them about their experiences. That is why we are often found lurking around on popular online forums like MSE, monitoring posts to see what people are soliciting advice on and/or what emerging issues there are.

A few times recently, we have come across threads about ‘grocery schemes’– from both employers who are considering implementing them and workers who are being offered them. Given they seem to be aimed at lower-paid workers and often seem to go hand-in-hand with salary advance schemes which we have also written about, our interest was piqued!

The strap line is that workers can save employee National Insurance on their regular supermarket shopping, which to the uninitiated probably sounds perfectly reasonable. But as we explain below, because of a small but important technical wrinkle, it is by no means certain that this is correct.

What are grocery schemes?

In the grocery schemes we have researched, an employee agrees to give up a portion of their gross salary (salary sacrifice) in exchange for some kind of physical or virtual payment card for groceries, that can be topped up every pay day with the amount of salary that has been sacrificed. Schemes seem to be structured differently but once the employer is ‘onboarded’, they usually involve some kind of app where employees can enrol, track their spending and add their card to their phone’s digital wallet. It is not really clear how the grocery scheme providers structure their fees in any of the examples we have looked at.

While salary sacrifice arrangements can offer income tax/NIC advantages in some scenarios (e.g. pensions or cycle-to-work schemes), there are generally no such savings in others, including this type of grocery scheme benefit. For tax purposes, at most, there will perhaps be a small cash flow saving if the employer reports the value of the benefit on the P11D at the end of the tax year, as any income tax payable by the employee is deferred.

However, we as explained above, some of these schemes are being sold on the basis that there is a saving of National Insurance contributions (NIC) for the employee. This seems to be because Class 1 NIC is only calculated on the worker’s salary, after the sacrifice and non-cash benefits do not usually attract employee NIC (more on this below). 

Some marketing that we have seen, suggests that there is an average 71% opt in rate if employers adopt the scheme and that employees can save up to £110 a month on average! While £110 a month may sound ambitious given the example above, it is important to realise we are not necessarily talking about insignificant ‘savings’ amounts - particularly when extrapolated across a workforce and, potentially, several tax years.

NIC – the technicalities

With regard to the National Insurance position, as mentioned above, the purported saving seems to come from the fact that there is no employee NIC on the amount of salary sacrificed – that appears to be the view of the scheme providers. But is that correct? We have concerns that this may not be the case.

While the worker is being provided with a benefit instead of the salary, as set out in HMRC’s NIC manual, non-cash benefits are usually subject to Class 1A NIC. Class 1A NIC is payable only by employers (at 15%) unlike Class 1 NIC, which is payable by both employees (at 8% or 2 % depending on the level of earnings) and employers (at 15%).

It’s true that, in some cases, if an employer directly gives an employee food or groceries, this might be subject to Class 1A NIC only. This is confirmed on GOV.UK. However, this is not what is happening here. Instead, the employee is purchasing their own groceries via funds placed at their disposal by the employer.

It is not always clear exactly how the schemes are set-up, but where an employer is doing this via gift cards, vouchers, or pre-paid debit or credit cards used for private purchases, we think there is a chance HMRC could consider these to be a non-cash voucher or a type of ‘credit token’ or indeed, simply other type of indirect cash payment. Whether they are provided in conjunction with salary sacrifice or not, these all technically remain liable to Class 1 NIC – not Class 1A.

Risks for employers and employees

The Class 1 NIC treatment is confirmed on GOV.UK for both vouchers and credit, debit and charge cards (known as ‘credit tokens’). Therefore, following the approach outlined in the marketed schemes could potentially lead to an underpayment of Class 1 NIC by both the employer and employee, if employers wrongly assume only Class 1A NIC applies.

As such, the use of such a scheme could result in HMRC saying there has been a failure to operate PAYE properly and this could lead to unexpected liabilities or penalties for both employers and/or their employees. Information about what to expect if there is a failure to operate PAYE (including employee NIC) can be found in our guidance for small employers. Note that where the employee NIC underpayment is not because of an error made in good faith, per HMRC’s manual guidance, it usually remains an employer liability.

Although we know HMRC are aware of the schemes, with at least one eminent tax/payroll professional seemingly having raised concerns with HMRC, it is worth noting that HMRC have not yet published any guidance expressly stating their view of grocery schemes (that we can find). We think it would be extremely helpful, before these schemes take further hold in the marketplace and before more employers/employees build up potential liabilities, for HMRC to do this as soon as possible.

Other issues to consider

There are a couple of important issues to consider around salary sacrifice in general:

• The reduction to an employee’s gross earnings could affect their future entitlements such as pensions, loans, benefits and mortgage applications.
• Employees cannot salary sacrifice to the extent that their gross pay falls below the National Minimum Wage.
• There may be implications for employees who are also universal credit recipients, if the reduction to their gross earnings reduces their take-home pay below any earnings thresholds.

You can read more about salary sacrifice (written from an employer’s perspective) on the GOV.UK website.

Final thoughts, specifically for employers

Given the risks of non-compliance, particularly around NIC, you should try to understand the basis of any technical position taken by a provider and seek independent verification of the NIC treatment before signing up to a scheme.

Technical information on the tax treatment of vouchers and credit tokens can be found in HMRC’s employment income manual on GOV.UK. There are separate links to HMRC’s internal NIC guidance on non-cash vouchers and credit, debit and charge card for private purchases.

While the marketing about these schemes will, no doubt, highlight the valuable benefits to employees, you should approach them with caution. As we have hopefully set out here, it is important to make sure you understand things for yourself. You may wish to seek advice from a tax adviser specialising in employment taxes and you can find guidance to help you find one in our getting help section.

If you decide to go ahead and implement a scheme, you should try and provide comprehensive information about the schemes to your employees, including on the advantages, challenges, and potential impacts on earnings, tax and NIC. This can empower them to make informed decisions and minimise risks. Again, an employment taxes adviser should be able to help you with that.