Upon the first introduction to salary sacrifice, employees might not consider it an attraction proposition. After all, the cost of living is only increasing, so why would someone willingly sacrifice a portion of their salary? But if the benefits are particularly useful and the employee can pay less income tax, then a salary sacrifice scheme is a brilliant incentive to attract and retain employees.
What is a salary sacrifice scheme?
A salary sacrifice scheme is an agreement between you and your employee in which the employee’s per annum salary is reduced in return for a non-monetary benefit. Those benefits could be a service, such as childcare, or goods, like a car. It’s a mutually beneficial agreement, saving on tax and national insurance contributions for both the employee and the employer. There are some key things to consider before initiating a salary sacrifice scheme. For example, a salary sacrifice must not take the employee’s earnings below the National Minimum Wage.
How does salary sacrifice work?
Before entering into an agreement, the employee and employer must agree on the cash value of the benefits to account for the loss of income. For example, a common salary sacrifice scheme is a workplace pension. If Sarah has a yearly salary of £40,000 with no benefits and she wants 10% of that to be put straight into her workplace pension, her new salary would be £36,000 and £4,000 would go into her pension. The cash total of the benefit is deducted from the employee’s per annum salary, saving on NICs for both parties.
What salary sacrifice schemes are available?
It’s important to note that not all benefits are eligible for tax and national insurance reductions. For example, gym memberships and mobile phones are common employee benefits, but they are not included in tax and national insurance exemptions.
Workplace pension: This is the most widely used salary sacrifice scheme. Many employees will be enrolled in this scheme without even realising it. Employees must make a minimum contribution of 3%, which is usually matched by the employer, and the employee can choose to increase these contributions. Bear in mind that each person cannot contribute more than £40,000 to their pension savings per year. That includes contributions made by the employer.
Cycle to Work: This environmentally-friendly scheme lets employees hire a bike. There are plenty of Cycle to Work scheme providers and the employee can usually communicate with them to choose the bike they want, or you can communicate this for them. There will be an agreed time period for which the employee is allowed the bike, but there are a few options. They can give the back bike at the end of the hire period, or the employee can enter into a new agreement to rehire the bike or buy it. The amount that the bike costs will be taken off the employee’s yearly salary and this will be reflected in their monthly payslip. It’s a great option for employees who want to buy a bike but can’t afford one up front while saving on NICs.
Car: Similarly to the Cycle to Work scheme, employers can offer a brand-new lease car. The lease amount will be deducted from the employee’s salary every month. Cars are considerably more expensive than bikes, so this will be a significant difference in employee’s payslips. However, the set monthly amount typically includes costs that come with owning a car, such as insurance, road tax, maintenance, servicing, and breakdown cover. The business does not own the car, it’s borrowed from the leasing company.
Other salary sacrifice schemes include health insurance, dental insurance, life insurance, personal learning, and pre-paid retailer cards.
What are the benefits of a salary sacrifice scheme?
Benefits for employees
- Save on income tax and national insurance contributions
The tax employees pay is based on how much they earn per month. Therefore, lowering salary will lower tax and NI contributions.
- Employees can grow their pension pots
If employees enter into a workplace pension, they can increase the amount they (and therefore, their employer) contribute to their pension. This helps their pension pot grow faster.
- Utilise the non-cash benefits
Some salary sacrifice schemes, like gym memberships, Cycle to Work, and car leases, allow employees to receive benefits they might not have been able to afford otherwise. Spreading out the cost makes luxury items more affordable, and these benefits can be for personal or business use.
While there are some attractive benefits, employees must assess their financial situation and ensure that the salary reduction is viable.
Benefits for employers
- Attract and retain employees
Salary sacrifice schemes can be a great recruitment tool. Top talent will often be attracted to competitive benefits packages, as well as a good salary. The schemes can also increase employee retention and satisfaction.
- Save on national insurance contributions
Employers don’t need to pay tax on the portion of the salary that is sacrificed, so companies will save money on national insurance contributions. It’s even more beneficial for employers if the employee chooses to agree to a long-running, high-value salary sacrifice scheme, such as leasing a car. Additionally, if the car is used for both personal and business use, the employer does not have to pay for mileage.
While salary sacrifice schemes seem like a no-brainer for employers, there are some complications. For example, if an employee leaves during the lease term for the Cycle to Work scheme or a car, the business will either have to pay an early termination charge or continue with the monthly payments.
How Finerva can help
While putting a salary sacrifice scheme in place seems straightforward, there are some intricacies to look out for. To keep in line with HMRC’s guidelines and requirements, consider working with an experienced accountant. The help and knowledge of Finerva’s tax and accountancy experts can guide you through the process, which is especially important to get right if you’re applying this scheme to multiple teams. Get in touch with one of our team today.
