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Salary Sacrifice: An Employer’s Complete Guide
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Get My Quotes26/09/2024
7 mins
Salary Sacrifice schemes offer a cost-effective way for your business to provide benefits to your team. Depending on the scheme, employees can enjoy tax savings, enhanced benefits, and improved wellbeing.
You, as an employer, also gain from having more motivated and content employees, along with potential tax efficiencies. But if you’re confused by how salary exchange works, you’re not alone. In this guide, we’ll explain everything you need to know about offering Salary Sacrifice to your employees.
What Is Salary Sacrifice?
Salary Sacrifice, also called salary exchange, is when an employee agrees to give up part of their gross salary in exchange for a non-cash benefit, like a pension contribution or a new bicycle. The amount is taken from their gross salary, which then reduces the National Insurance contributions for both you and the employee, in most cases.
Why Is Salary Sacrifice Important?
Salary sacrifice schemes are a win-win for employers, offering a savvy way to boost your benefits package without breaking the bank. By letting your team trade a portion of their salary for valuable benefits, you not only save on National Insurance Contributions but can also boost employee engagement and motivation.
Common Salary Sacrifice Benefits
- Salary Sacrifice Workplace Pensions
- Gym memberships
- Workplace Nursery Schemes
- Cycle-To-Work Schemes
- Tech Schemes
- Electric Vehicle Schemes
- Holiday Trading
- Adding Family Members to a Health Insurance Plan
- Childcare Vouchers (closed to new applicants in October 2018).
In today’s competitive job market, salary sacrifice benefits can help to set you apart as an employer. It can open up benefits to your staff which might otherwise have been unaffordable, such as electric cars, tech and even enhanced pension contributions.
Nadeem Farid
Head of Health & Wellbeing Benefits
How Does Salary Sacrifice Work?
Although it might sound complicated, the salary exchange process is pretty straightforward. It’s an agreement between you and your employee. By opting into a salary exchange benefit, your employee agrees to sacrifice part of their gross salary in exchange for a non-cash benefit.
As a result of lowering their gross salary, they can, in some cases, reduce the amount of income tax and National Insurance they pay. You, as an employer, can also benefit from tax savings. We’ve provided a simple breakdown of how it works in more detail below.
Step 1: Contractual Agreement
Start by deciding what Salary Sacrifice program you want to offer, such as Cycle To Work or Techscheme. If an employee then chooses to opt into a scheme, they can agree on how much salary to give up in exchange for the benefit.
For tangible items or services, you then pay the invoice for the item, effectively purchasing it on the employee’s behalf. This works differently for Salary Sacrifice Workplace Pensions, where there won’t be an invoice to pay, just monthly deductions which are paid directly into your chosen pension fund.
Step 2: Salary Reduction
The contractually agreed amount is then subtracted from the employee’s monthly gross salary over a set period of time (usually 12 months, though not for Workplace Pensions, these are ongoing unless an employee opts out of a scheme). This happens before taxes and National Insurance are calculated. Because the exchanged salary isn’t taxed, both you and the employee save money on these payments.
Step 3: Receiving The Benefit
Once all the paperwork is sorted, employees can start enjoying the benefits. Whether it’s an electric car, an eco-conscious eBike, or saving for retirement, they’re good to go.
It’s important to know that some benefits, like cars and pensions, may have extra rules. Plus, any salary that’s exchanged can’t bring an employee’s pay below the national minimum wage. You’ll need to make employees aware that a scheme can affect entitlement to certain benefits like statutory sick pay or redundancy pay.
IMPORTANT NOTICE 🧐
If opting into a Salary Sacrifice benefit would result in an employee’s salary dropping below the Lower Earnings Limit (£6,396 per annum for the 2024/25 tax year), their entitlement to state benefits could be impacted. It’s advisable to seek expert advice before proceeding with enrolment.
Benefits Of Salary Sacrifice For Employers
Salary sacrifice schemes offer a host of benefits for employers, making them an attractive option for many companies. Benefits include:
National Insurance & Tax Savings
Employers can save on National Insurance contributions. This is because they will only pay NI on the employees’ reduced salary. This can lead to significant savings if a large number of employees opt into salary sacrifice schemes. Beyond this, they can also benefit from tax savings.
Increased Productivity
Benefits like CycleScheme and corporate gym memberships contribute to maintaining a healthy workforce. For instance, studies have found that regular cyclists take 1.3 fewer sick days a year on average compared to non-cyclists. They can also make employees feel more valued, which can lead to higher levels of engagement and productivity.
Happier Employees
Companies providing attractive Salary Sacrifice options often enjoy higher employee morale and increased performance. Our 2023 Workplace Satisfaction Survey found that 20% of UK employees feel their performance at work has been impacted by the cost of living crisis, so offering cost-saving benefits can help boost employee happiness and productivity.
Incorporating salary sacrifice benefits can be a strategic move for companies aiming to elevate their B Corp score or achieve B Corp certification too.
The benefits offered can demonstrate an employers commitment to social and environmental responsibilities.
Joseph Toft
Senior Consultant, Employee Benefits
Attracting & Retaining Talent
In today’s workforce, flexibility is a key factor in making your employer brand stand out. Offering attractive benefits such as enhanced pension contributions, childcare, or Cycle to Work schemes, can make the overall compensation package more appealing. This can make you stand out in a competitive job market.
It’s not just about getting employees through the door; it’s about keeping them. A flexible benefits package, including Salary Sacrifice schemes, can significantly enhance talent retention.
Fosters A Positive Culture
By supporting an employee’s financial and personal needs through salary exchange benefits, you can foster a positive workplace culture. This includes promoting healthier lifestyles, supporting environmental sustainability and demonstrating commitment to employee well-being.
Benefits Of Salary Sacrifice For Employees
Salary exchange offers a clever way for employees to stretch their income further, whilst enjoying some fantastic benefits. By opting into such perks, they can benefit from:
Cost Saving
For benefits like electric vehicles, tech equipment or bikes, Salary Sacrifice schemes can offer a budget-friendly alternative to outright purchase. They help spread the cost over time without interest or additional charges, making high-value items more accessible.
National Insurance Savings
By reducing their taxable income through Salary Sacrifice, employees pay less in National Insurance contributions. And for Workplace Pension schemes, if you opt for Simple Salary Sacrifice, you can actually help to increase employees’ take home pay as the NI savings get added to it.
Enhanced Financial Wellbeing
Offering more efficient ways of saving, such as through Workplace Pension contributions, salary sacrifice can contribute to an employee’s long-term financial security. This can provide them with peace of mind and relieve some financial stress.
Feeling Valued
Offering employees comprehensive benefits can lead to them feeling more valued and appreciated. In turn, this can lead to enhanced job satisfaction and loyalty. In fact, in our latest employee benefits and workplace satisfaction survey, 27% of employees said that benefits and perks are what made them happiest.
It can cost around 30-40% of a leaver’s salary to hire a new employee. With this in mind, it’s important to consider how a great employee benefits package can help retain staff.
Nadeem Farid
Head of Health & Wellbeing Benefits
What Benefits Can Employees Receive In Exchange For Salary Sacrifice?
There are lots of different Salary Sacrifice schemes to choose from in the UK. Here are some that leading employers in the UK are using:
Workplace Pension Salary Sacrifice 💰
Salary Sacrifice Workplace Pensions are a common way for employees in the UK to give their pension pot a little boost. By opting to contribute a portion of their pre-tax salary into their pension, they can enjoy immediate tax and National Insurance savings.
As an employer, you also contribute to your employee’s pension. As a minimum, you must pay at least 3% of their qualifying earnings. Many employers choose to offer enhanced contributions to make the benefit more appealing. This set up is a great way of amplifying the growth of an individual’s retirement fund, making it an even more attractive option.
Read more about Salary Sacrifice pensions.
Cycle To Work 🚲
Cycle to work schemes offer a money-saving option for employees interested in getting a bike. You, as the employer, front the money to buy an employee’s cycling equipment through an approved scheme. The employee then pays you back over 12 months through Salary Sacrifice.
Payments come out of an employee’s gross salary before PAYE and National Insurance, meaning they pay less tax. After the 12-month period is up, they have the option to own the bike and gear outright at the end of it. It’s an affordable way to get your workforce moving.
Read more about Cycle To Work Salary Sacrifice.
Electric Vehicles 🚗
Similar to Cycle To Work schemes, employees have the option to lease an electric vehicle through Salary Sacrifice. It’s a good opportunity for employees to save money on what is typically a significant and costly purchase, all while embracing an eco-friendly mode of transportation.
At Drewberry, we’ve teamed up with Octopus EV to assist employees and companies in discovering the top deals available through this Salary Sacrifice scheme.
Read more about electric car Salary Sacrifice.
GymFlex 🧘♀️
GymFlex is a scheme that offers discounted corporate gym memberships to a number of different UK health clubs, gym chains, and leisure centres. It can save employees up to 40% on the cost of an annual membership, and is paid for via Salary Sacrifice or net pay deductions.
As an employer, you pay an annual fee to be part of the scheme. Then, employees can choose from over 3,600 health clubs, joining the one that suits them best. Your staff can save up to 40% on their annual membership fees to gyms, health clubs, leisure centres, yoga studios, and boot camps.
Techscheme 💻
Did you know that Salary Sacrifice schemes can cover the cost of purchases at IKEA and Currys? Through Techscheme, employees can get a brand new piece of kit at a discounted price, and they don’t have to pay upfront or deal with interest. Plus, the cost is spread out over a year, which helps them save money in the long run.
Read more about Techscheme Salary Sacrifice.
Holiday Trading 🏖️
Holiday Trading schemes allow employees to buy extra days of annual leave, or sell unwanted holiday back to you through Salary Sacrifice. It’s a simple, flexible benefit that allows your employees to choose the holiday leave that best suits their personal needs.
The amount of salary sacrificed depends on the employee’s contract, salary, and how many days they wish to buy. Remember, you can cap the amount of annual leave staff can buy or sell.
Read more about Holiday Trading Salary Sacrifice.
It can be hard to navigate the various rules, so it’s best to chat to an expert so you can get the full picture. Give us a call on 02074425880 or email help@drewberry.co.uk to get started.
Richard Noble
Senior Consultant, Employee Benefits
How Salary Sacrifice Benefits Impacted By Tax?
This is a tricky one to answer, as the various schemes are taxed differently. Most non-cash benefits that are set up through Salary Sacrifice will be classed as a Benefit in Kind – meaning they’re subject to taxation and will need to be reported on a P11D.
The only benefits you don’t need to value (and don’t have to report to HMRC) are:
- Workplace Pension payments
- Pension advice you provide as an employer
- Workplace nurseries
- Childcare vouchers and employer-provided childcare (started on or before 4th October 2018)
- Bicycles and cycling equipment.
We’ll explore how tax works for different schemes below.
Workplace Pensions
When employees agree to exchange part of their salary for pension contributions, they effectively lower their gross income. This means they reduce their taxable salary, which results in them paying less tax and National Insurance.
Your business also benefits from lower National Insurance Contributions. For example, if an employee reduces their salary from £30,000 to £28,500, you’d only need to pay National Insurance contributions on £28,500.
You then have a choice of what to do with the savings you make:
- Reinvest them back into your business
- Pass 50% or 100% back to your employees (to either top up their pension contributions or boost their take home pay)
- A mix of both.
Here’s what it looks like in practice for the 2024/25 tax year. For this example, we’ve used an employee earning £30,000 per annum who wants to exchange £1,500 of their salary for their pension.
| No Salary Sacrifice | Salary Sacrifice | |
|---|---|---|
| Gross Salary | £30,000 | £28,500 |
| Tax (20%) | £3,186 | £3,186 |
| Employee NI Contributions (8%) | £1,394.40 | £1,274.40 |
| Employee Pension Contributions | £1,500 | £1,500 |
| Take Home Pay | £23,919.60 | £24,039.60 |
Cycle To Work Calculations accurate as of April 2024.
Cycleschemes
With the reduction in salary that the Cycle To Work scheme brings, your employees pay less tax and National Insurance, and you also save on your NI contributions.
Guidelines from the HMRC state that VAT is payable on the cost of equipment purchased through a scheme. However, cycle helmets are exempt from this and are zero-rated for VAT. You, as an employer, are responsible for claiming the VAT paid when purchasing the initial package, and for remitting the VAT from employees’ repayments to HMRC.
Bikes and equipment that are purchased outright to hire out to your staff will be classed as an allowable business expense. This means you can reduce your corporation tax bill as your taxable profit will decrease by the total value of the salary sacrificed by your staff.
Here’s what it looks like in practice. For this example, we’ve used an employee earning £35,000 per annum who wants to buy a bike package for £500.
| Cycle To Work (12 Month Plan) | Costs & Savings |
|---|---|
| Total cost of new bike and cycling gear | £500 |
| Ownership fee after 12 months | £35 |
| Monthly deductions from salary | £41.67 |
| Total income tax & National Insurance savings (8%) | £139.92 |
| Total amount paid | £395 |
| Percentage saving overall | 21% |
Calculations accurate as of April 2024.
Electric Vehicle Car Schemes
When it comes to Electric Vehicle schemes, you’ll have to pay the National Insurance on the Benefit in Kind tax that your employees pay. The good news is, this is only 2% for electric cars (until 2025). However, you will still benefit from NI savings due to the lower gross salary of employees participating in the scheme. You can also benefit from a lower corporation tax bill due to the fact associated costs are deemed as an allowable business expense.
Here’s what it looks like in practice. For this example, we’ve used an employee in the 20% tax bracket (earning up to £50,270 a year) who wants:
- To lease a Mazda MX-30 Hatchback
- 36 month lease
- Annual mileage of 10,000
- With full insurance, servicing and maintenance included in the salary sacrifice option.
| EV Salary Sacrifice Vs EV Personal Lease | ||
|---|---|---|
| Lease Type | Salary Sacrifice | Personal |
| Lease Cost | £555 | £555 |
| Income Tax Saving | -£111 | £0 |
| National Insurance Savings (8%) | -£44.40 | £0 |
| Benefit In Kind Tax (BIK) | +£10 | £0 |
| Total Monthly Cost | £399.50 | £555 |
Calculations accurate as of April 2024.
EXPERT TIP 🤓
You can even offer groceries through Salary Sacrifice! Certain schemes provide up to 8% off employee food shops through National Insurance savings.
Corporate Gym Memberships
Gymflex is effectively a loan, so there’s no direct tax saving, but the employee does save on their National Insurance contributions. As an employer, you’ll pay Class 1A National Insurance on the benefit provided.
Here’s what it looks like in practice. For this example, we’ve used an employee earning £30,000 a year who wants a membership to PureGym in Brighton.
| Example | Cost |
|---|---|
| Employee cost: personal membership | £18.99 per month |
| Employee cost: Salary Sacrifice | £14.99 per month |
Calculations accurate as of April 2024.
Techschemes
Techscheme is effectively a loan, so there’s no direct tax saving, but the employee does save on their National Insurance contributions. As an employer, you’ll pay Class 1A National Insurance on the benefit provided.
Here’s what it looks like in practice. For this example, we’ve used the purchase of an Apple iPad Pro at £769 over 12 months:
| NI rate | 10% | 2% |
|---|---|---|
| Monthly cost | £58.96 | £62.80 |
| Employee NI saving | £61.52 | £15.38 |
| Total purchase price | £707.48 | £753.62 |
TechScheme Calculations accurate as of April 2024.
Holiday Purchase Schemes
If an employee agrees to a reduction in salary in exchange for additional holiday, then they’ll save on tax and National Insurance. You also save on your employer contributions. On the other side, if the employee gives up some holiday in return for payment, then that payment is treated as additional salary. Tax and National Insurance will then be due.
Here’s what it looks like in practice. For this example, we’ve highlighted the annual and monthly costs for an employee earning £30,000 who wants to buy five holiday days. To work out the day rate (5 days per week x 52 weeks per year = 260 days a year) we divided £30,000 by 260 days, giving us £115.39.
| Holiday Pay Calculations | ||
|---|---|---|
| Earnings & Deductions | Standard | Buying 5 Days |
| Monthly Gross Income | £2,500 | £2,500 |
| Annual Sacrifice | -£0 | -£576.95 |
| Monthly Sacrifice | -£0 | -£48.08 |
| Income Tax (20%) | -£290.50 | -£280.88 |
| NI (8%) | -£116.20 | -£112.35 |
| Monthly Net Income | £2,093.30 | £2,058.69 |
Calculations accurate as of April 2024
IMPORTANT NOTICE 🧐
Salary Sacrifice can affect an employee’s borrowing power. If a staff member is considering a mortgage, loan, or credit card, they should be made aware of this before signing up.
Salary Sacrifice Frequently Asked Questions
What are the disadvantages of Salary Sacrifice?
Salary Sacrifice has some great benefits, but employees should think carefully before deciding to give up some of their income. Here are the main downsides to make your people aware of:
- The amount they can borrow on a loan or mortgage can be affected
- Entitlement to state benefits (such as Statutory Maternity Pay) can be affected
- Any Life Insurance payouts may be smaller due to reduced income
- Pension contributions can be affected.
How much of their salary can an employee sacrifice?
When it comes to the amount of salary your employees can exchange, there are a few things to consider.
For pensions, the annual limit for contributions is £60,000, which includes contributions made by both the employee and you as the employer. For this reason, you need to ensure that the higher contributions made from an employee’s Salary Sacrifice don’t go over this total.
For other Salary Sacrifice schemes, there’s no fixed “limit”, but an employee’s pay must stay above the national minimum wage after the deductions have been made.
Can you make changes to a salary sacrifice arrangement?
Employees typically have the flexibility to start or stop a Salary Sacrifice arrangement as needed, depending on company policies, scheme rules, HMRC practices, and the nature of the benefit offered in exchange for the sacrificed salary.
If an employee wishes to cancel the arrangement, it may necessitate a change to their contract of employment. This ensures that the adjustment aligns with both legal and company requirements. With some schemes (such as Gymflex and Electric Vehicles), employees can only cancel their agreement in certain circumstances, such as medical conditions or financial difficulty.
Can employees opt out of Salary Sacrifice schemes?
Depending on which Salary Sacrifice scheme an employee is signed up to, they may opt out of their arrangement under certain circumstances. You’ll need to alter their contract, ensuring their cash and non-cash entitlements are stated clearly.
Does Salary Sacrifice appear on a payslip?
Yes, a Salary Sacrifice will show up on an employee’s payslip. The amount sacrificed will appear as a deduction before National Insurance and tax is applied.
Can Salary Sacrifice be mandatory?
No, there’s no obligation for employees to participate in a Salary Sacrifice scheme. Any reductions made to staff salary needs to be agreed by both the employee and you as the employer.
Salary Sacrifice Made Simple With Drewberry
There’s lots to consider when setting up a Salary Sacrifice scheme. Your budget, your team’s priority and your employee engagement strategy will all be important factors affecting which product is right for you.
Our Drewberry experts are here to help, making sure you get the most suitable scheme for your people. We ❤️ employee benefits, so you don’t have to. To speak to one of the team call 02074425880 or email help@drewberry.co.uk.
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