Business owner? How “salary sacrifice” can benefit both you and your team

business meeting with a wall full of Post-it notes

If you’re a business owner, retaining and attracting great staff will likely be one of your key challenges. Indeed, research reported by SME suggests that 3 in 4 UK businesses feel hiring has become harder in the past five years.

If you want to be competitive when it comes to hiring, it’s no longer a case of simply offering a competitive salary.

People Management reports that more than half of 18- to 34-year-olds believe a good benefits package is the most important thing they look for when searching for a job.

So, if you’re looking to differentiate your firm from your competitors, salary sacrifice could be a great option.

Under a salary sacrifice arrangement, employees forego some of their salary in return for other perks. It can boost wellbeing, enhance your benefits package, and reduce costs for your business – read on to find out more.

Exchanging some salary for a non-cash benefit

In simple terms, a salary sacrifice arrangement is an agreement to reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit.

There are many types of benefits you could offer under a salary sacrifice scheme:

  • A car, such as under the Electric Car Scheme, that can save you a significant sum on an electric car
  • The cycle-to-work scheme where you give up some of your earnings in return for a heavily discounted bicycle or e-bike
  • Gym memberships
  • Pension contributions.

The main benefit of salary sacrifice to employees is that, as the deduction reduces their salary, they will pay less Income Tax and National Insurance (NI). Instead, the employee “buys” something valuable to them – such as a car lease or higher pension contributions.

Employees can reduce their tax bill and retain access to childcare perks

Perversely, sacrificing some salary can see an employee’s take-home pay rise.

Moreover, it could be an innovative way to make your business more attractive and help you to retain and attract talent. Indeed, Employee Benefits says that 2 in 5 UK employees admitted they would choose a job with a lower salary but generous employee benefits.

The Guardian shares a useful example of salary sacrifice in action.

  • Imagine you have an employee who earns £35,000 a year and contributes 5% of her earnings (£1,750) to her workplace pension.
  • Once she has paid Income Tax and NI, she would take home £27,319.
  • She decides to use salary sacrifice to make her pension contribution.
  • Her gross annual salary falls by the amount of the pension contribution (from £35,000 to £33,250) but using salary sacrifice means she actually takes home slightly more money: £27,459. That’s an additional £140.

The sums can be even more significant for those nearing a tax threshold.

  • Your employee earns £52,500 a year and uses salary sacrifice to save £2,300 into her pension.
  • Here, she moves down a tax bracket – from 40% to 20%.
  • In terms of her annual net pay, she would be almost £500 better off as a result, because it would rise from £39,167 to £39,664.

A further benefit of salary sacrifice is that it can help any employees affected by the High Income Child Benefit Charge or those at risk of losing out on the government’s free childcare offering.

From 6 April 2024, if employees earn more than £60,000, part of their Child Benefit can be clawed back. Once an employee earns £80,000 or more, they will lose all their Child Benefit.

In addition, employees who earn £100,000 or more lose access to government-funded free childcare.

If an employee reduces their salary below either of these thresholds, they could be significantly better off as they may retain their Child Benefit or valuable free childcare.

The Guardian shares a useful example.

  • You have an employee with two children who earns £105,000.
  • She adds £5,250 to her pension using salary sacrifice and reduces her salary to £99,750.
  • She will be £8,427 better off including tax saved.
  • She will retain access to 15 to 30 hours of free childcare every week.

Considering that the National Childbirth Trust (NCT) says that 25 hours a week at a day nursery for a child under the age of two costs an average of £138 a week, using salary sacrifice could represent a substantial saving.

A couple of issues to consider

While salary sacrifice offers many benefits, there are a couple of points to consider.

Firstly, as an individual is reducing their salary, this could have a knock-on effect on their borrowing potential when it comes to getting a mortgage or other loan.

Lenders typically agree mortgages based on affordability, and so an employee might find their borrowing potential is affected if they sacrifice salary for other benefits.

Additionally, certain workplace and statutory benefits such as maternity pay and sick pay are based on salary. Consequently, reducing how much an employee earns could affect the level of benefits they receive.

Salary sacrifice can also reduce your business costs

One final benefit of offering salary sacrifice is that it can help your business to reduce costs.

The reason is that you no longer have to pay employee NI on any “sacrificed” salary. So, to use the example above, if an employee earning £35,000 decides to use salary sacrifice to make her pension contribution, your business will save £241.50 as you don’t pay 13.8% employer NI on the sacrificed salary.

You could then choose to use part or all of these savings to boost the pension contributions you make for employees, further enhancing your benefits proposition.

Get in touch

If you’d like to explore how salary sacrifice could benefit your team and enhance your benefits package, please get in touch. Email or call us on 01454 416653.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

Workplace pensions are regulated by The Pension Regulator.

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