In this blog, we’re going to take a look at all things salary sacrifice, including the benefits, potential drawbacks and how to set up a salary sacrifice scheme with your company!
What Is A Salary Sacrifice Scheme?
A salary sacrifice scheme is an agreement between an employer and an employee where the employee agrees to forgo part of their salary in return for benefits of a similar value. The most common salary sacrifice scheme is pension contributions, which can also be used for other benefits such as childcare vouchers or company car schemes.
In this blog, we’re going to take a look at all things salary sacrifice, including the benefits, potential drawbacks and how to set up a salary sacrifice scheme with your company!
Are There Advantages & Disadvantages Of A Salary Sacrifice Scheme?
As with any finance scheme, a salary sacrifice arrangement will have advantages and disadvantages. Here are a few of the most important ones to consider:
Advantages Of Salary Sacrifice Schemes
Let’s examine a few of the advantages of a salary sacrifice arrangement:
Save Money On Income Tax & National Insurance:
The main benefit of salary sacrifice is that it can save you money when you pay tax. For example, if you’re a basic rate taxpayer on the national minimum wage and opt for this scheme, you’ll save 12% on the cost of your childcare through less income tax and NI contributions.
Boost Your Pension Contributions:
Salary sacrifice arrangements can also be an excellent way to boost your state pension pot if you’re a basic rate taxpayer, as you’ll get 20% tax relief on the amount you sacrifice from your salary. Higher and additional rate taxpayers will get 40% and 45% tax relief, respectively. If your company already has a workplace pension scheme but you’re looking to save on your contributions, this can be a great way to do so.
Non-Cash Benefits:
One of the most appealing qualities of salary sacrifice schemes is the wide range of benefits you can receive. Childcare vouchers, cycle-to-work schemes and annual leave are just a few to choose from.
Disadvantages Of Salary Sacrifice Schemes
Now we’ve looked at the many advantages of salary sacrifice arrangements; let’s look at a few of the disadvantages you should keep in mind.
Reduced Take Home Pay
One of the main disadvantages of salary sacrifice is that it can reduce your take-home pay. This means you might have to budget carefully to ensure you can still afford your monthly outgoings.
Only Available to the Employed
Additionally, salary sacrifice schemes are usually only available if employed by a company. This means self-employed workers and those on zero-hour contracts will miss out on these non-cash benefits.
Non-Permanent
It’s also important to know that salary sacrifice schemes are not always long-term. Your employer could cancel the scheme at any time, potentially leaving you worse off financially.
Who Is Eligible For Salary Sacrifice?
If you’re interested in all that a salary sacrifice arrangement offers, you may wonder if you are eligible for one. As a general rule, you qualify for a salary sacrifice scheme if you meet the following criteria:
- You’re over the age of 21
- You’ve worked at your company for over 12 months and aren’t on probation.
- Your salary must not fall below the national living or minimum wage during monthly payments after any salary sacrifice arrangements.
- You must have had a full driving licence for more than six months with no more than six current endorsement points for all vehicle drivers.
Our blog, ‘Am I Eligible for a Salary Sacrifice Scheme‘ provides more information on what it takes to acquire a salary sacrifice arrangement.
How Is Salary Sacrifice Calculated?
The amount of salary sacrifice is calculated by your employer and is typically a fixed percentage of your gross salary. The amount you sacrifice is deducted from your pay before tax, and National Insurance contributions are calculated according to this.
In the UK, the minimum amount you can salary sacrifice is £5,824 per year (2020/21 tax year), and the maximum is £40,000 per year; the amount you can sacrifice will depend on your circumstances and salary.
If you’re a higher earner, you may also be able to take advantage of the government’s pension tax relief scheme. This allows you to receive up to 45% tax relief on contributions to your pension pot, making it an even more attractive way to save for retirement. For more information, visit our blog on ‘Do I Pay Tax On Salary Sacrifice Cars?’.
Benefits Of Salary Sacrifice For Employers
There are several benefits for employers who offer salary sacrifice schemes to their employees in the UK. Perhaps the most significant one is that it can help to reduce an employer’s overall National Insurance Contributions (NICs).
When an employee sacrifices part of their salary in exchange for a benefits package, the employer pays fewer NICs on the reduced salary. Our Employer Zone is a great way to learn more about employer contributions, salary sacrifice contributions and everything else salary sacrifice related.
How Can Salary Sacrifice Benefit My Company?
– Increased employee morale and motivation, as employees feel that their company offers them an excellent earnings-related benefits package.
– Improved retention of employees, as individuals are less likely to leave an organisation if they receive a non-cash benefit.
– A reduction in the overall cost of employee benefits, as salary sacrifice schemes can be used as cheaper alternatives to standard benefits packages.
Benefits Of Salary Sacrifice For Employees
As mentioned earlier, there are many benefits to using this type of sacrifice scheme; let’s explore a few ways this can benefit employees.
1. Increased take-home pay: With this deduction, employees can increase their take-home pay as the amount of tax deducted from their salary is reduced.
2. Access to benefits: Employees who participate in these schemes can often receive a non-cash benefit that they would not have access to otherwise. This includes childcare vouchers, pension contributions, and a salary sacrifice car scheme.
3. Increased pension: Employees can increase the amount paid into their pension contribution by sacrificing a portion of their salary. This is also a great way to boost retirement savings.
4. Reduces tax liability: Salary sacrifice can help to increase tax savings by reducing tax liability as the amount of taxable income is reduced when a portion of the salary is sacrificed.
5. National Insurance contributions: By sacrificing a portion of their salary, employees can benefit from national insurance savings; this can be a great way to save money on taxes.
Salary sacrifice is an excellent option for employees looking to increase their take-home pay and access to benefits and reduce their overall tax liability. More information is available in our employee zone.
Examples Of Salary Sacrifice Arrangements
When it comes to salary sacrificing, there are several different options and arrangements that you can choose from. It all depends on what you want to sacrifice and how much you want to give up to receive tax benefits. Here are some common salary sacrifice arrangements:
Pension Contributions
An employee’s pension contributions are one of the most common salary sacrifices in the UK. Currently, the minimum your employer must contribute is 3%, but a salary sacrifice scheme is a great way to increase this.
How Does A Salary Sacrifice Pension Work?
Essentially, contributions from your employer increase, except that they are your contributions because your salary is reduced to accommodate this. The payments now count as an employer contribution rather than an employee contribution. Simultaneously, this reduces your pre-tax salary and, therefore, your income tax and national insurance contributions too.
Advantages Of Salary Sacrifice Pension Contributions?
The main advantage is that you’ll pay less tax and national insurance, but what other benefits are there?
Grows Your Pension Pot Faster
Sacrificing a portion of your salary will ensure that your employer makes a higher monthly contribution. In turn, this leads to your pension fund growing faster than before.
Extra Pension Tax Relief
The amount you sacrifice on your gross salary is not subject to income tax or NI contributions, meaning you save more long-term.
Childcare Vouchers
Another common non-cash benefit is childcare vouchers. Like most parents, you’re always looking for ways to save on childcare costs; if you’re employed, you may be able to do this through salary sacrifice and childcare vouchers. Under the arrangement, your employer agrees to reduce your salary by an agreed amount each month, which you can then use to pay for childcare. This cash benefit saves you on tax and National Insurance contributions (NICs). For example, if you’re a basic rate taxpayer and you sacrifice £100 of your salary each month, you’ll save £20 in income tax and NICs (assuming you’re not a higher rate taxpayer). Your net childcare costs will be £80 per month, which is a significant saving.
Salary Sacrifice Car Schemes
Furthermore, if you’re a young person looking to get your first car or even upgrade from your old one, you may have heard of salary sacrifice car schemes. In short, this is where you agree to give up a portion of your salary in return for the company providing you with a brand-new car. The amount you sacrifice each month is then taken off your taxable income, so you end up paying less tax overall and receive an amazing new car. For more information on this, look at our ‘Salary Sacrifice Car Schemes: How do they Work?’
Cycle To Work Scheme
There are many reasons why the Salary Sacrifice ‘Cycle To Work’ Scheme is so popular. One of the main reasons is that it can help you to save money on your commute. If you live in a city and have to travel to work, then the cost of public transport can add up, but by using a bike instead can avoid all of those costs and still get where you need to go. This also keeps you fit and healthy. If you use your bike to commute, then you will get some exercise every day without even having to think about it.
What Other Things Can Be Claimed As Part Of Salary Sacrifice?
In addition to the more well-known benefits that can be salary sacrificed – such as pension contributions and childcare vouchers – there are several other potential options open to employees.
These include Health assessments, Dental treatment, Eye care, Cycle to work schemes, Mobile phone contracts, Gym membership and Computer equipment. One of the great things about salary sacrifice is that it can be tailored to suit the individual needs of each employee. As long as both employer and employee are happy with the arrangements, there is a lot of scope for creativity!
How To Set Up Salary Sacrifice?
If you’re an employer, start by:
1 – Contacting your payroll provider to see if they can facilitate salary sacrifice schemes.
2 – Employees must agree to the change in the contract or through a formal agreement letter.
3 – A salary-sacrifice worker group must be created. Make sure this is set up so that the employer pays all contributions and that the working group is labelled accordingly e.g. ‘Salary sacrifice.
4 – Once the employer has received their employee’s permission and has their new worker group in place, they can set up the salary sacrifice scheme through their payroll.
How Do I Implement A Salary Sacrifice Scheme For Electric Vehicles?
If you’re an employer or employee and are interested in discovering more about an electric car scheme, why not speak to our expert team today? Here at Fleet Evolution, we’re proud specialists in electric salary sacrifice car schemes and are the leading provider in the UK.
You can be sure that our driven customer service team will help answer any questions and sort electric vehicles for your company today!
So, Is Salary Sacrifice Worth It?
In conclusion, salary sacrifice is definitely worth it. You can receive a range of amazing non-cash benefits and save vast amounts on NI contributions. As long as budgeting is kept in mind, salary sacrifice can be the perfect way to see more benefits at your company.
Salary Sacrifice FAQs
We’ve done our best to answer some of the most common questions regarding salary sacrifice arrangements below:
Is Salary Sacrifice Based On Qualifying Earnings?
If your employer uses a defined contribution scheme, which most do, then the qualifying earnings used to meet the minimum requirement are based on the post-sacrifice salary.
Does Salary Sacrifice Save On Tax And NI Contributions?
With salary sacrifice, everyone pays less tax, so employers and employees pay less in National Insurance contributions (NIC).
Is There A Limit To A Salary Sacrifice?
There isn’t a specific limit to how much you can sacrifice. However, your reduced salary has to remain above the national minimum wage.
Can I Have A Salary Sacrifice Pension If I’m Self-Employed?
Salary sacrifice is not available if you’re self-employed. The only way you can receive this is to be a company director of your limited company and pay yourself dividends.
Can You Salary Sacrifice Statutory Maternity Pay?
No, statutory maternity pay cannot be sacrificed or offset against other non-cash benefits.
Does Salary Sacrifice Show On An Employee's Payslip?
A salary sacrifice contribution will appear on your payslips. The sacrificed amount will appear as a pre-tax deduction before national insurance contributions are applied.