What is salary sacrifice? And how does it work?

What is salary sacrifice?

A salary sacrifice arrangement is a contractual agreement between employers and employees where an employee agrees to have a portion of their salary taken in return for a non-cash benefit.

They’re sometimes referred to as salary exchange arrangements and they allow employees to save on tax and national insurance.

The employer can also save on national insurance costs, and in some cases with some salary sacrifice schemes they can also save on employee salaries too.

The employee typically agrees to a monthly reduction in their salary in return for the non-cash benefit, in effect paying for their non-cash benefit with their pre-tax earnings monthly.

In effect, this allows an employee to typically get their non-cash benefit for less than they might elsewhere, thanks to the tax savings, thus saving while also spreading the cost.

So, why do employees save on tax and national insurance with salary sacrifice?

The salary an employee gives up as part of their salary sacrifice arrangement is treated as a reduction in earnings for tax purposes. This means their salary is then typically taxed at a lower rate.

This is where the saving comes in for employees.

What are the advantages for employees and employers?

If you’re an employer, check out our full article on the benefits of salary sacrifice for a full breakdown of the advantages of salary sacrifice for the business.

For employees, advantages include:

• Potential savings of up to 42% on non-cash benefits (examples below)
• Spread the cost of the benefit, typically over 12 or 18 months
• No credit checks
• Plus all the advantages of the non-cash benefit itself.

The further advantages of salary sacrifice for employees depend on the salary sacrifice scheme itself and how each scheme works individually.

So, what are some examples of salary sacrifice schemes?

Salary sacrifice examples

Here we’ll touch on some salary sacrifice examples, as well as one scheme that has since closed but employers can still provide.

Bike to Work scheme

The Bike to Work scheme is perhaps the most popular salary sacrifice example.

It continues to be more and more popular with employees each year, and for good reason.

Employees can not only save up to 42% and spread the cost of their new bike, they can also save on accessories too.

Staff can also benefit from reduced commuting costs such as on fuel or public transport, while incorporating exercise into a busy day.

Holiday Trading

Holiday Trading allows employees to sell and buy annual leave to and from their employer.

Employees can purchase extra annual leave days and pay for them through salary sacrifice, giving staff more control over their work-life balance while staying on top of their finances.

Car Benefit Scheme

Another hugely popular salary sacrifice scheme is the Car Benefit scheme, where employees can drive a brand-new car and pay through salary sacrifice, spreading the cost and making savings.

The salary sacrifice element of this scheme makes this one of the cheapest motoring options for employees, especially with ULEVs which often provide even bigger savings through reduced Benefit in Kind rates.

The Car Benefit scheme also bundles everything together in a just-add-fuel arrangement, taking the stress out of motoring too.

MotorSave

The most recent salary sacrifice scheme to be introduced, MotorSave helps employees save up to 10% on the cost of car maintenance including MOTs, servicing, repairs and other routine maintenance.

As ever, a huge benefit to the scheme is allowing employees to spread the cost, which is one reason why the scheme is so popular.

Car maintenance costs can really sting and often come out of the blue. MotorSave helps to mitigate against this giving employees more control.

Childcare Vouchers

Here is the scheme we talked about being closed to new entrants but still available for employers to provide their employees.

A legacy scheme, Childcare Vouchers has since been replaced by the tax-free childcare scheme, however those that applied before the scheme was closed to new entrants can still benefit.

If your business already provides these, when new benefits are introduced, even with a new benefits provider your business can still continue to provide this benefit and even incorporate it on to a new platform.

Important salary sacrifice considerations

Before you provide salary sacrifice schemes, there are a few important things to consider.

Changes or cancellations to salary sacrifice arrangements

The salary sacrifice arrangement is an agreement between the employer and employee and once this is agreed, any changes can only be agreed between both parties.

Sometimes, life events can significantly affect an employee’s financial circumstances, thus prompting the need for a change in their salary sacrifice arrangements.

Changes can be made to salary sacrifice arrangements where defined life events occur such as marriage, divorce and redundancy for example.

Check with your salary sacrifice scheme provider what events apply for each scheme.

The cost-efficiency of salary sacrifice

Employers must also consider the cost savings of salary sacrifice schemes.

Often what a business saves in national insurance when employees take up salary sacrifice arrangements can offset much of, and in some cases all of, the cost of providing the schemes in the first place.

This makes salary sacrifice schemes incredibly cost effective where they’re popular with employees.

How salary sacrifice affects National Minimum Wage (NMW)

Employers must also consider how reductions in salaries through salary sacrifice arrangements affect employees.

For example, an employer must not allow a salary sacrifice arrangement to reduce an employee’s earnings below National Minimum Wage (NMW), even where an employee may agree to it.

The right processes and procedures must be put in place to avoid this happening.

Working with an employee benefits provider can help.

An employee benefits provider can put the right procedures in place for you, alerting you to where a salary sacrifice application would drop an employee’s salary below NMW.

Introducing salary sacrifice to your employees

Looking to introduce salary sacrifice schemes to your employees?

At Access, we provide employee benefits, including all the salary sacrifice schemes mentioned here, to over 2,000 organisations through our Salary Extras employee benefits platform.