You can configure Dayforce to process a salary sacrifice, which is an arrangement available to UK employees who agree to reduce their gross pay in return for an eligible non-cash benefit. The salary sacrifice earning type is a negative earning that behaves like a deduction.
The advantage of a salary sacrifice is that, because the employee receives less salary, they pay less tax and National Insurance (NI), and the employer pays less NI. Examples of eligible benefits include childcare vouchers, employer contributions to an employee's pension, and bicycles and equipment under the Cycle to Work (C2W) scheme.
Example of Salary Sacrifice
An employee opts into a salary sacrifice arrangement where monthly pay is reduced for pension. In the employee's pay slip, the Allowances section shows a negative allowance of £125 for Pension Salary Sacrifice:
In the following screenshot of the Employee subtab of Pay Run Management > Preview, you can see the following:
(1) The employee's total gross pay, which is reduced by the salary sacrifice amount.
(2) Under the Salary Sacrifice heading, a negative entry for Pension Salary Sacrifice.
(3) and (4) The EE NI and PAYE employee statutory deductions, and the ER NI employee taxes, exclude the salary sacrifice amount. This is because, in this example, the salary sacrifice allowance Pension Salary Sacrifice is tax and NI exempt:
Add an Allowance Code
In Dayforce, you configure salary sacrifice arrangements as allowance codes, rather than as deduction codes. This allows Dayforce to generate the amount as a negative allowance that reduces the gross pay that the employee is entitled to, and for the amount to show in the Earnings section of the payslip. To create an allowance, go to the Earnings tab in Payroll Set-up > Earnings and Deductions and click Add. In the Allowance Type field, select Salary Sacrifice.
If needed for a salary sacrifice allowance, in the Tax and Compliance tab, click the NI-able checkbox to set the allowance as subject to NI. Click the Taxable checkbox to set the allowance as subject to tax.
Configure a Generated Allowance
In the General tab of the selected allowance, you should configure salary sacrifice allowances as generated allowances. Generated allowances are a type of allowance that you assign to an employee's payroll elections so that Dayforce calculates an amount on a scheduled basis (for example, each pay). Generated allowances aren’t the same as time-based allowances, which are calculated based on hours worked.
You can still create manual entries for generated earnings in the Payroll feature as needed. When you create a manual entry for a salary sacrifice allowance, you need to enter a positive value in the Amount field. So, if you want to process a quick entry for £243 for the Childcare Vouchers salary sacrifice allowance, you would enter 243.
To configure an allowance to be generated, you must select the Generated checkbox for the selected allowance.
After you select the Generated checkbox, you can configure the allowance in the same way as you would other generated earnings. This includes:
- The method used to generate the allowance, such as based on a flat amount, a percent of normal earnings, or other parameters.
- The pay groups to which the allowance is available.
- The limit associated with the allowance (for example, fixed amount limits) and how these limits are measured (for example, year-to-date or each current pay).
- The third-party payees who can receive the allowance.
Configure Salary Sacrifice Settings
When an allowance has Salary Sacrifice as the allowance type in the Tax and Compliance tab, the Options tab shows the Salary Sacrifice Configuration Parameters section.
| Setting | Description |
|---|---|
| Allow Arrears | Indicate that the salary sacrifice code allows arrears. When the employee enters arrears, Dayforce tries to collect the arrears balance from the next available earnings, in addition to the scheduled payment or quick entries. You can review the arrears balance and transactions in the Arrears and Balances section in the Payroll > Payroll Elections screen of People. |
| Allow Partial | Indicate if the salary sacrifice allowance allows partial payments in the case where the employee doesn’t have enough earnings to cover the entire payment amount. |
| Allow Partial Balance Reclaim | Indicate if a partial amount from the outstanding balance can be collected in the pay period in which the employment status is terminated, and there aren’t sufficient funds to cover the outstanding balance. This checkbox is only applicable if the Reclaim Balance on Termination checkbox is selected. |
| Display Remaining Balance on Earning Statement | Show the remaining balance for the salary sacrifice allowance on UK employee payslips. This checkbox is only applicable when you select the Is Declining Balance checkbox. Dayforce shows the balance in the Other Payroll Information section of the payslip. |
| Is Declining Balance | Indicate if the salary sacrifice allowance allows a declining balance. When this checkbox is selected, Dayforce only processes the scheduled salary sacrifice payment if there’s a balance record for the employee. Balance records are saved in the Arrears and Balances section in the Payroll > Payroll Elections screen of People. When the balance reaches zero, Dayforce stops processing the scheduled payment. You can also use quick entries in Payroll to manually increase or decrease the balance. |
| Reclaim Balance on Termination | Indicate if Dayforce tries to deduct the outstanding balance of the salary sacrifice allowance from the pay period where the employee is terminated. |
| Net deduction code | Select the deduction code that is used to reclaim the outstanding salary sacrifice balance for terminated employees. When an employee with a salary sacrifice balance is terminated, the outstanding balance is reclaimed is reclaimed as a net deduction using the deduction code that you select. |
Third Party Payments Report
Although a salary sacrifice isn’t a deduction, there are specific providers who handle the different types of benefits (for example, childcare vouchers). The existing Third Party Payments Report of Payroll shows payments made to third-party payees for salary sacrifice allowances:
Typical Setup for Salary Sacrifice Arrangements
This section describes the typical configurations for salary sacrifice arrangements for pensions, childcare vouchers, and the Cycle to Work program.
Salary Sacrifices for Pensions
You can use salary sacrifice allowances as part of a scheduled pension arrangement, or a one-time amount if there are bonuses. The typical condition for a salary sacrifice pension arrangement is that the employee agrees in advance to sacrifice an amount of their salary in exchange for their employer contributing to the employee's pension, rather than the employee making the contribution.
This differs from a non-salary sacrifice pension arrangement, where employees opts to receive their full salary, and then elect to make an employee contribution to their pension from their gross pay.
In Payroll Set-up > Earnings and Deductions, you generally configure salary sacrifice pension arrangements as follows:
- In the Earnings tab, create a salary sacrifice allowance to reduce the employee's pay.
- In the Deductions tab, create a memo deduction that is set up as a pension with the pension provider as the payee. This is used to process the employer's contribution to the employee's pension plan.
For example, say that an employee opts to sacrifice 3% of their salary every pay, in exchange for the employer contributing 5% of each pay. The payslip shows the negative allowance Pension Salary Sacrifice for the 3% deduction, and a memo deduction for Employer Pension of the 5% employer pension contribution. The 5% is calculated based on the employee's gross earnings before the salary sacrifice is reduced.
Salary Sacrifice for Childcare Vouchers
You can use a salary sacrifice allowance to reduce the employee's pay in return for childcare vouchers. The amount of gross pay that employees reduce for childcare vouchers is exempt up to a certain limit based on the employee's income.
You can configure limits for the allowance in the Limits tab of the Earnings tab in Payroll Set-up > Earning and Deductions. You can define how the limit is measured, such as a fixed amount, and what period is counted towards the limit, such as year-to-date.
You can use the Over Limit Earning drop-down list to define the allowance that Dayforce uses in the case where the deduction limit is reached. See UK Payroll Allowances.
Salary Sacrifice for Cycle to Work
You can use a salary sacrifice allowance to reduce the employee's gross pay in return for a loan for a bicycle and equipment under the Cycle to Work (C2W) arrangement.
In the Options tab of the Earnings tab in Payroll Set-up > Earnings and Deductions, you can configure the allowance to allow for a declining balance. You can then add the balance of the loan to the Arrears and Balances section in the Payroll > Payroll Elections screen of People. When the balance reaches zero, Dayforce stops processing the scheduled payment. You can also use quick entries in Payroll to manually increase or decrease the balance. See Configure a Generated Allowance.