Salary Sacrifice – Help employees make the most of take-home pay

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With the ever-rising cost of living, how can employers help employees make the most of their net pay?

A salary sacrifice scheme can do just that.

As people feel under financial strain and pressure, using salary sacrifice to make the most of employee salaries can be a cost-effective way to help meet some everyday bills.

What is salary sacrifice?

A salary sacrifice scheme is an arrangement between an employer and an employee to reduce an employee’s entitlement to cash pay, in return for a non-cash benefit. The deduction reduces the employee’s gross salary resulting in less tax and national insurance required to be paid, and the employer also saves on national insurance too.

Whilst on the face of it employees are agreeing to give up some of their hard-earned salary, it can be a great way to take up benefits and pay less tax.

How does salary sacrifice work?

An agreement is entered into between employer and employee for a range of non-cash benefits which is exchanged for salary. These are commonly things such as pension contributions, gym membership, buying additional holiday entitlement, bicycles and cars.

Note that care should be taken when considering the appeal of a car salary sacrifice scheme due to the benefit in kind charges on the value of the car, especially where they have high emissions. However, electric cars incur an exceptionally low benefit in kind at 2% for 2022/23, continuing to April 2025. This, coupled with businesses working towards a low-carbon future, can be an attractive offer for staff looking for robust environmental policies and added benefits.

An even greater environmentally friendly option is to offer the Cycle to Work Scheme, where employees repay the cost of purchasing a bike using salary sacrifice each month.

Example of Salary Sacrifice Scheme

A simple example of how the salary sacrifice scheme could benefit as a pension contribution is as follows.

Salary £30,000

Employer pension contribution 5%

Employee pension contribution 5%

*based on rates 14^th November 2022

Benefits of Salary Sacrifice Schemes

• Employees pay less tax and national insurance
• Employees can access services at a more cost-effective rate
• Employers pay less National Insurance
• Doesn’t cost anything for businesses to offer a salary sacrifice scheme, meaning overheads do not need to increase but the business can be competitive within the recruitment market.

Is Salary Sacrifice an option for your employees?

Whilst there are clearly some distinct benefits for employers to offer salary sacrifice schemes, particularly as an incentive when gaining and retaining good staff, there are a couple of areas employers do need to be mindful of:

• Be aware that a reduction in taxable salary can impact an employee’s borrowing eligibility, the multiple used on salary for life insurance and entitlement to statutory maternity pay
• Note that such an arrangement must not reduce an employee’s cash earnings below the National Minimum Wage