The lowdown on salary sacrifice schemes and tax
Suggesting that your employees sacrifice some of their well earned salary may not go down all that well initially, but it could save them money in the long run.
The scope of salary sacrifice is now broad and becoming more and more popular. With legislation ever evolving and seemingly a lot of legwork to get going, we’ve simplified everything you need to know - starting from the basics to the finer details of tax implications - all in this handy guide.
What is salary sacrifice and how does it work?
When employees agree to give up a portion of their salary for additional benefits via their employer - this is what is known as salary sacrifice. The scheme is available for a range of products and services including transport, childcare and even technology.
Once an employee agrees to exchange part of their salary, the employer will in return provide a non-cash benefit in the form of vouchers (for childcare for example) or contributions towards a personal pension. The idea behind this is that employees will, despite having a reduced salary, pay less tax as well as receive more value in the form of vouchers and/or contributions.
The amount that is deducted and when is usually determined by the employer.
As an employer, you will also pay less employer’s national insurance and this saving is partially or fully passed on to the employee. Indirectly this can save companies employment costs.
5 ways to take advantage of salary sacrifice schemes
1. Pension 💰
The most common salary sacrifice scheme and the one that is most familiar is pension.
Once set up, a specified amount is taken out of the salary and invested into the employee’s individual pension fund rather than paid in income tax and national insurance to the inland revenue.
Salary sacrifice pension example:
In this case, we have taken an annual salary of £25,000 and outlined the approximate pension contribution should this individual opt to sacrifice £1,000 of their annual salary.
*These figures are just an indication
2. Workplace nurseries 👶
A great way to provide safe and secure childcare for your employees at a reduced cost is through a workplace nursery scheme. Employees are able to use this benefit at any approved nursery that satisfies government criteria.
Under the ‘workplace nurseries exemption’, the cost of a place in a workplace nursery is no longer subject to tax and national insurance payments, allowing employees to save up to 42% on nursery fees. It’s a win-win scheme as both employers and nurseries make a tax saving too.
This scheme is not to be confused with tax free childcare - which has no involvement with the employer and is administered purely by the government. However using one doesn’t limit use of the other - both can be used simultaneously - you can find out more here.
Salary sacrifice workplace nursery example:
*These figures are just an indication
3. Childcare vouchers 🧒
Another popular salary sacrifice scheme is for childcare vouchers. Employers can provide a fixed amount of employee-supported childcare to employees without having to pay or report anything.
Although the scheme closed to new applicants in October 2018, employees can still use existing vouchers if they were already signed up.
4. Cycle-to-work scheme 🚲
Bikes and bicycle safety equipment are usually offered as a loan under the salary sacrifice arrangement through employers and then sold to an employee after the end of the loan period at the market value at the time.
The exemption from tax and national insurance contributions will not apply if any salary sacrifice agreement builds in from the outset a direct transfer of ownership to the employee at the end of the hire period.
Salary sacrifice cycle to work example:
*These figures are just an indication
5. Flexible benefits 🛍️
Some employers offer flexible benefit packages, which allow employees to buy extra or alternative benefits directly from their salary. Healthcare cash plans, private medical insurance, gym memberships for example, can be offered at favourable corporate rates to the employee through the salary sacrifice arrangement.
You can also choose to 'buy' additional holiday as a top up to your standard annual leave allowance. As with standard salary sacrifice schemes, employees benefit through lower tax payments due to a reduced overall pay.
The added advantage of offering flexible benefits is that it gives the individual more options to pick what is right for them and their current needs.
How to set up a salary sacrifice scheme at your company
In order to set up a salary sacrifice scheme, the employer must change the terms of the employee’s employment contract and then process the amended salary via payroll. The employee needs to agree to the amendments and any changes cannot be applied to the salary retrospectively.
As an employer, it does not cost to enroll employees in a salary sacrifice scheme, but you must ensure that the employee salary does not go below the national minimum wage after any deductions have taken place.
If an employee decides to opt-out at any time, these changes must be reflected on their contract per the effective date of the changes.
As a rule, employees can choose whether or not they want to sacrifice part of their salary anytime, however each business may decide to set a specific window to minimise admin.
Advantages of salary sacrifice
The primary advantage of the scheme is to extend employee savings at no extra cost to the employee or the business. Supporting employees with their financial wellbeing through salary sacrifice will have positive knock on effects on productivity, engagement, health and happiness. Stress levels and sick days are also likely to reduce.
Business savings can be especially high if a large number of employees choose to take part in the scheme. It’s also a great way for employers to attract and retain talent.
Looking at the benefits individually, workplace nurseries enable employees to go back to work sooner, cycle to work schemes promote a healthy lifestyle and private medical insurance provides the best flexible care for teams, when they need it.
Disadvantages of salary sacrifice
There are some downsides to this scheme. Employees could be impacted by the lower take home salary, with less flexibility in their monthly pay to spend elsewhere.
More broadly, with a lower salary, eligibility for a higher mortgage loan, income protection benefit and personal loans will be impacted. In addition, contributions to state benefits and incapacity benefits, maternity pay and child tax credits are likely to decrease.
When employers set up the salary sacrifice scheme, in most cases they have to pay for the non-cash benefits upfront, and these finances could be used elsewhere in the business.
In addition, there are administration costs which can take up a lot of time to complete which may put more pressure on resources.
How we can help
Due to the current pandemic, lots of companies are taking their employee benefits more seriously and striving for a more impactful strategy to better look after their people and this includes increasing the accessibility to salary sacrifice schemes.
At Ben, we know that this isn’t easy. To help, we can simplify the salary sacrifice process to make it quicker and easier for your employees to take advantage of the scheme.
Each of the different benefits have various criteria and conditions attached - meaning it can be a tricky world to navigate. Also, just the thought of additional paperwork is not fun, so we take care of all of that for you (we LOVE tax).