At its most basic, salary sacrifice means giving up part of your salary in exchange for a non-cash benefit. For example, you earn less gross income per month, but you receive a company car or increased pension contributions from your employer.
Salary sacrifice is mutually beneficial to both employees and employers, but it can be difficult to understand how exactly. Read on to find out.
What Is Salary Sacrifice?
Many employers will offer a salary sacrifice scheme for their employees to opt into. This involves the employee sacrificing part of their salary and earning a lower wage in return for a non-cash benefit from their employer.
It is illegal for your salary to fall beneath the National Minimum Wage. Consequently, if you are already earning low rates, a salary sacrifice scheme may not be suitable for you.
The money the employee ‘sacrifices’ is paid by the employer into something else that will benefit the employee. So the employee won’t get cash, but they will still get their money’s worth.
Non-cash benefits could be many things: a car, bicycle, bus pass, phone or tablet, childcare, training, increased employer pension contributions, additional annual leave. The list goes on, and the terms surrounding each benefit differs from scheme to scheme.
The amount of salary the employee sacrifices is agreed with the employer and varies according to which benefit they receive.
For an employee to access the benefits of a salary sacrifice scheme, they will have to sign a new contract with their employer. This will dictate the amount of their new salary and the benefit they receive in exchange. Change to this contract can normally be made once a year, but will have to be agreed with the employer.
How Does Salary Sacrifice Work?
With a salary sacrifice scheme, your salary decreases. Because of this, you will pay a reduced amount of income tax and National Insurance (NI). This works two ways, since your employer will also pay reduced NI contributions.
In the UK, since 2017, reduced rates of tax and NI only apply to the following salary sacrifice schemes:
- Employer-provided childcare
- Ultra-low emission vehicles (including company cars)
- Retraining courses and outplacement services
- Intangibles e.g. more annual leave
This is because the tax-efficiency of salary sacrifice schemes (i.e. paying lesser rates of tax and NI) diverts a lot of income tax away from HMRC and the Exchequer.
Other salary sacrifice schemes may no longer save on tax, but you can still enjoy decreased corporate rates or be able to purchase expensive items outright.
For example, through the employer, the employee can purchase a mobile phone on finance at lower corporate rates. The salary they have sacrificed goes toward paying off the finance.
Note that while salary sacrifice is optional and you can generally opt out at any time, if you are using it to pay off a personal possession on finance (such as a mobile phone), opting out will make you liable for any outstanding payments.
Take Pension Schemes as an Example
The most common salary sacrifice schemes are pension schemes. With these, the employee agrees to reduce their salary, and the employer pays the difference into their workplace pension, along with their regular contribution to the scheme.
Since reduced tax rates still apply to salary sacrifice pension schemes, the employer might pay part or all the money they saved on NI contributions into the employee’s pension as well.
In this case, the employee either:
- Increases their pension contribution without affecting their take-home pay
- Increases their take-home pay while maintaining the same pension contribution
By raising their pension contributions at no extra cost to themselves, the employer will benefit in the following ways:
- Reputation as an employer improves
- Higher staff recruitment and retention
- Higher levels of morale and motivation
- Bolstered benefits package to offer employees
Things to Know for Employees
Before you commit to a salary sacrifice scheme, discuss the following things with your employer:
- Whether the amount of salary you sacrifice will move you from a higher to lower tax band
- Whether any benefits linked to salary will decrease (e.g. death benefits and life insurance, sick pay, redundancy payments, overtime rates)
- Whether statutory benefits will be impacted (e.g. maternity/paternity pay)
- Whether bonuses, pay increases and pension benefits will be affected
- Terms surrounding departure from a salary sacrifice scheme (i.e. potential refunds on contributions)
It is also worth noting that a lower salary can affect entitlements like mortgage applications based on your income.
Things to Know for Employers
- An employee’s salary cannot drop below National Minimum Wage by law.
- You should give your employees an overview of how salary sacrifice might affect them. Let them know whether you will use their pre- or post-sacrifice salary to determine benefits such as over time rates or sick pay.
- If an employee is off work, you may have to continue with their pension contribution even if they are not receiving paid leave. Review the terms of their contract of employment.
- Salary sacrifice can generate extra administration costs. Your NI savings could contribute to cover this.
There are thousands of salary sacrifice schemes out there, and every employer has a different benefits package set up. Enjoy Benefits is just one of many companies offering salary sacrifice schemes for employers and employees to take advantage of. But we would be happy to talk you through it in more detail.
To find out more about salary sacrifice and what schemes are available, explore our website or call 0800 088 7315 with any enquiries.