Salary sacrifice can be a highly effective way to compensate your workers, while also potentially making your business even more tax-efficient.
So, find out how salary sacrifice works, and why it can be an attractive work perk for both employers and employees.
Exchanging cash pay for a non-cash benefit
Salary sacrifice involves an employee giving up part of their salary or wage in return for a non-cash benefit.
There are various benefits that you as a business owner could offer to an employee in return for reduced pay. You can read more about these benefits and their taxation below.
To put a salary sacrifice scheme in place, you and your employee must agree to it. This change must then be reflected in your employees’ contract, making it clear what cash and non-cash benefits they are entitled to at any given time.
You must also update the employment contract if this arrangement changes at any point.
Employers can offer various non-cash benefits without reporting them to HMRC
For the majority of non-cash benefits you can offer employees, you’ll need to work out the equivalent value of what they’re receiving and pay the correct amount of tax or National Insurance (NI) on it accordingly.
Aside from this rule, however, there are also some non-cash benefits that do not need to be valued and reported to HMRC. These include:
- Employer pension contributions
- Pensions advice provided by you as the employer
- Workplace nurseries
- Bicycles and cycling safety equipment, including the “cycle to work” scheme.
Of all the salary sacrifice options available, reducing pay in return for additional employer pension contributions is typically the most popular. This is because it can benefit both an employee and you as the employer.
Salary sacrifice pension contributions have valuable tax benefits
For employees, salary sacrifice pension contributions are highly tax-efficient. As your workers earn less in cash, it allows them to reduce their Income Tax and NI bill while still essentially retaining the same amount of take-home pay.
The full amount sacrificed will then be paid into their pension fund by you as an additional employer contribution.
Meanwhile, this strategy also offers valuable tax benefits for business owners. Salary sacrifice involves reducing your employees’ gross salary. In turn, that means the employer National Insurance contributions (NICs) you would have to pay will likely also be reduced.
The more your employees earn, the higher your NICs will be for them. So, the most significant savings here will generally come from offering a salary sacrifice arrangement to your highest earners – and of course, the more employees who enter an arrangement, the greater the savings.
You could then choose to pay the business’s NICs savings into your employees’ pension as an incentive to encourage more employees to take salary sacrifice. Or you could simply keep this money and use it to continue growing the business.
All in all, an arrangement like this can be a great perk to attract and retain the best talent, while being a sensible way for you to make your business even more tax-efficient.
There are downsides of salary sacrifice that you should make employees aware of
Of course, as with any financial strategy, there are also some notable downsides to salary sacrifice for employees. As a result, it’s important you make these clear to your workers so that they fully understand what they’re signing up for.
The first major downside they might encounter is that a reduction in gross salary may affect their affordability for loans such as mortgages.
Mortgages are typically calculated from earnings, so it may mean your workers are able to borrow less from lenders if they sacrifice a portion of their salary.
Additionally, it may affect their entitlement to certain work benefits. For example, you might offer a death in service arrangement to your workers. If you do, this will also be linked to their salaries.
As a result, their families might find themselves in the unfortunate position of receiving less than they might have been expecting if the worst were to happen.
Make sure your employees fully understand these elements before they agree to reduce their gross salary.
Work with us
Want to find out even more strategies to help you best manage your money? Get in touch with us at Rosebridge.
Email email@example.com or call 01204 300010 to speak to us today.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.