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Salary sacrifice benefits during maternity leave

  • United Kingdom
  • Employment law


A recent decision from the EAT suggests that, during maternity leave, an employer can withhold childcare vouchers provided under a salary sacrifice scheme. Employers should be wary of relying on the case, however, as doing so could undermine the scheme itself and risks exposure to penalties for underpaying tax and/or national insurance.

The case of Peninsula Business Services Ltd v Donaldson concerned a childcare voucher scheme offered by way of salary sacrifice. It was a condition of entry to the scheme that, during maternity leave, provision of childcare vouchers would be suspended and salary would be treated as returning to its previous level for that period. Ms Donaldson, who was pregnant at the time of wishing to join the scheme, believed the condition of entry was discriminatory and so refused to join and brought various discrimination related claims.

At the root of Ms Donaldson’s claims lay the Maternity and Parental Leave Regulations, which say that when an employee on maternity leave is entitled to the benefit of all of her usual terms and conditions of employment except for terms about remuneration. For these purposes, ‘remuneration’ is defined as being sums payable to an employee by way of wages or salary. In essence, therefore, although employees are no longer entitled to their usual pay when on maternity leave, they do still have the right to receive non-cash benefits.

So where did this leave Ms Donaldson’s childcare vouchers? The EAT was of the view that if the childcare vouchers had not been provided under a salary sacrifice scheme then the employer would have been required to continue to supply them. Because of the salary sacrifice arrangement, however, the EAT ruled that there was no such obligation.

The EAT’s reasoning was, in essence, that a salary sacrifice arrangement (at least so far as childcare vouchers are concerned) simply involves an employee purchasing a benefit from the salary they have earned and the ‘salary sacrifice’ is effectively just a mechanism whereby the earned salary is diverted to the employer instead of going to the employee. So, according to the EAT, a voucher provided under a salary sacrifice arrangement is simply something purchased with remuneration and as the law says remuneration can be discontinued during maternity leave, there is no need to continue providing the voucher.

The difficulty with the EAT’s reasoning is that long-established case-law makes it clear that the very essence of a successful salary sacrifice scheme is that the employee is not merely diverting earned wages to pay for some other benefit: if they were, then the full amount of pre-sacrifice earnings would be taxable as earnings. In order for salary sacrifice to be effective those cases suggest that there has to be a variation to the employee’s contractual entitlement to remuneration, reducing it and replacing it with some other benefit: it is not simply a case of diverting an element of pay; the employee’s underlying legal entitlement to salary has to be reduced.

It seems unlikely that the case will go to the Court of Appeal – the Claimant was not legally represented and did not attend the EAT hearing. So the EAT’s decision is unlikely to be disturbed in the near future. On the surface this may appear to be good news to employers, seemingly giving them the green light to withhold childcare vouchers (and some other benefits provided under a salary sacrifice scheme) during maternity leave. That approach could, however, backfire unless HMRC changes its approach to salary sacrifice arrangements. The reason for this is that if HMRC investigates a salary sacrifice scheme and picks up on the fact that the employer has been withholding benefits from women on maternity leave on the strength of this case, that could undermine the employer’s claim that salary was successfully sacrificed and lead to substantial penalties for underpayment of tax and/or NI contributions. We understand HMRC plans to issue revised guidance for employer sin light of this case and it may well be that the new guidance will give employers greater comfort. Until then, however, employers need to bear this risk in mind before changing the way they deal with benefits during maternity leave.