Salary sacrifice 101: All employers need to know

business meeting employer explaining what is Salary sacrifice
Amba

Salary sacrifice has been around for a long time, but despite being officially sanctioned by HMRC, some companies are afraid of it. They wrongly think of it as some kind of tax loophole, and as a result, their employees miss out on a fantastic range of benefits.

In fact, businesses are disregarding millions of pounds of potential savings they could give to their workforce during the cost of living crisis. So if you’re new to salary sacrifice, it’s time to learn its secrets.

What is salary sacrifice?

In a nutshell, salary sacrifice (or exchange) is simply a tax-efficient way for employees to pay benefits/pension contributions. Employees agree to sacrifice a portion of their salary to allow you, their employer, to make a payment on their behalf. These payments for pensions and benefits are taken from gross salary, rather than NET, and thus create savings on tax and National Insurance.

An employer can set up a salary sacrifice arrangement by changing the terms of an employee’s contract. Of course, the employee needs to agree to this change! And the arrangement must not reduce an employee’s earnings below the National Minimum Wage.

Simple enough so far.

What are the benefits of salary sacrifice?

With employee pensions, salary sacrifice arrangements allow for tax savings that can boost contributions. This creates a higher monthly pension contribution at no increase in cost.

For other benefits, employees can save money on what they choose because they aren’t paying income tax or National Insurance on the money used for the purchase.

Taking the time to set up a salary sacrifice scheme for your employees can help them to feel more valued and more like they belong. This is especially the case with new parents who could benefit from childcare vouchers or on-site nurseries, and otherwise have enough stresses to think about. Likewise it can also help eco-conscious employees to make purchases that align with their values or invest more with a net-zero pension provider.

Can employers save money too?

Yes! The reductions apply to employer contributions as well. The amount an employer can save depends on the size of their workplace pension scheme and the value of the salary exchanged.

Other than pensions, what benefits are available via salary sacrifice?

An employer can offer a wide range of benefits to their workforce. These include (but aren’t limited to):

Are there any negative consequences to salary sacrifice?

Before entering into a salary sacrifice arrangement, an employee should take advice about any possible knock-on effects to state benefits, student loan repayments, mortgage applications and other credit-related aspects of personal finance.

The cost of living crisis

As we’ve seen, salary sacrifice can be good for employees and employers. While it isn’t better than a pay rise, it increases an employee’s purchasing, spending and investment power at a critical time. During the present crisis, anything you can do to help your employees weather the financial storm is helpful. After all, pension contributions are hard to maintain if we are concerned about putting food on the table or paying for fuel. Salary sacrifice can give employees the resources to sustain their preferred way of living while investing in their pension, and perhaps go beyond minimum contributions.

In addition to relieving financial stress, it can improve your employees’ health and wellbeing too. In addition to gym memberships and cycle-to-work schemes, private medical insurance is accessible this way. And electric vehicles purchased through a salary sacrifice scheme will help the whole planet’s health.

How easy is it to implement? Will it be an HR nightmare?

The answer is, it needn’t be. If you use Lumina, we can set the whole thing up for you. So if you’d like to save your employees and your business money, why not get the ball rolling, and make a start today?