Written by Sam Dow | 7th March 2023
Many employees today are understandably concerned about making ends meet and how to make their money go further, but many businesses are also feeling the squeeze and may not have the budget to offer pay rises or other cash benefits. But what about salary sacrifice schemes?
One way you can give your employees more flexibility with their finances and support their financial wellbeing is via salary sacrifice schemes – an arrangement whereby your employee gives up or ‘sacrifices’ a portion of their salary in exchange for other, non-cash benefits.
Cash savings are achieved because the employee will pay less tax and National Insurance on their pay than they did before, because the salary is sacrificed from gross salary, leaving a lower salary against which to calculate these deductions. Employers also pay lower NI contributions so there are savings for all.
These tax-efficient schemes can be used for childcare vouchers (if the employee was enrolled to the scheme by 2018), pension contributions, and cycle to work schemes. Schemes can also be run for other benefits such as company cars and electric vehicles, although Benefit in Kind tax will still apply on these.
More than half (54%) of people in the UK say that the struggle to meet everyday living costs is preventing them from saving the amount they want to for their future, so salary sacrifice could really help give piece of mind by supporting more people to make pension contributions.
What do we need to consider?
You will need to communicate the scheme and how it works clearly to your employees so they understand any implications. How much of their salary your employees can ‘swap’ for a non-cash benefit depends on the type of benefit you are offering and a number of other factors.
A lower income can reduce an employee’s entitlement to earnings related benefits from the Government such as Universal Credit and Additional State Pension. Depending on your company schemes, a lower salary may also impact their maternity, paternity and adoption pay, or any other benefits linked to salary such as Death in Service benefits. Consider whether you will pay overtime premiums and bonuses based on the “old” or “new” salary amount.
You must not allow any employee to sacrifice parts of their salary if it would leave them with less than the National Living Wage. It’s important to identify all implications of your scheme and communicate these to your employees before they make their decisions about whether to give up some of their salary.
What is the process of salary sacrifice?
Once you have communicated the scheme and the employee has asked to sacrifice some of their salary, there needs to be a formal agreement in place, confirming the size of the reduction in salary in exchange for the benefit or contribution being made into their pension scheme.
Once the sacrifice scheme has been agreed, you must also change the wording in your employee’s contract of employment, and PAYE details updated.
These agreements are intended to be in place long term, and at least 12 months. However HMRC do accept changes to the arrangements without consequences in the event the employee’s financial circumstances change, such as through marriage, divorce or a partner becoming redundant or pregnant.
What are the benefits of salary sacrifice schemes?
- Tax efficiency
Salary sacrifice changes your employee’s pay package to make it more tax efficient, at no additional cost to you or the employee.
Giving up a portion of their income means they will be taking home less, so will pay less income tax and National Insurance (NI) on their earnings. As an employer, you will save on your contributions to National Insurance too, reducing your people costs.
If an employee chose to give up part of their salary in exchange for increased contributions to their pension, contributions from you as an employer would increase, however, this is not costing the business any more as the payment has been deducted from their salary.
- Gives employees financial flexibility
There are multiple ways your employees can make use of a salary sacrifice scheme – it doesn’t just have to go towards a pension.
Many parents who joined childcare voucher schemes before they were phased out in 2018 continue to work while saving money on childcare costs; receiving childcare vouchers in return for salary sacrifice. Employers can offer cycle to work schemes through salary sacrifice, so employees can purchase bicycles and equipment to use on their commute; great for saving money and saving the environment.
They can also be used to fund gym memberships, to purchase additional annual leave and for the purchase of health insurances or an electric car. These types of benefits are usually taxable under Benefit in Kind rules, so again the employee would need to fully understand the implications before they agree to the scheme.
Salary sacrifice schemes don’t have to be permanent and can be put in place for a year or two, depending on how long your employee wants or needs it for.
- Makes you an attractive employer
Salary sacrifice schemes can be advantageous to you as an employer in adding value to your overall benefits package, making you more attractive to potential employees, and helping to retain your current talent.
Employers who are seen to promote and support employee wellbeing (physical, mental, and financial) through their benefits are more attractive to job seekers. In fact, 60% of UK employees say that when choosing an employer, it’s important they are offered a choice of benefits relevant to them. Offering different benefit options through salary sacrifice schemes allow you to cater for all employees, no matter their age or stage of life.
Will it work for our employees?
Salary sacrifice is a great scheme for your employees to make use of. That being said, they will need to weigh up the individual pros and cons of the scheme that apply to them.
The non-cash benefits they sacrifice salary for must be attractive and have some value for them, and so as a business you should consider which options you offer under the scheme. Another obvious point is that an employee will be taking home less pay each month, and so will have less cash income for their normal outgoings. Do make this absolutely clear as the scheme may not suit everyone.
It’s clear that salary sacrifice can benefit your employees and offering this alongside your benefits package may provide reassurance and help them feel supported at a time when they may be anxious about money.
If you have any questions about a salary sacrifice scheme or reviewing your benefits packages, or wish to hear about any of our HR Outsourcing services please get in touch with our team at info@realityhr.co.uk.