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A beginner’s guide to salary sacrifice for employees

A Beginner’s Guide To Salary Sacrifice For Employees

At first glance, salary sacrifice doesn’t sound too appealing. Who would want to give up a portion of their salary?!

In fact, salary sacrifice can provide a financial benefit to employees, while reducing a company’s National Insurance Contributions. And more and more businesses are realising it’s potential with 41% of SMES and 61% of large companies offering salary sacrifice to their employees.

In this article, we provide a beginner’s guide to salary sacrifice, including its benefits and drawbacks.

Need help understanding what employee benefits your staff need? Give our friendly award-winning team of brokers a call on 01273 222805 or drop us an email at [email protected] for FREE advice and support.

 

What is salary sacrifice?

Also known as salary exchange, salary sacrifice is a scheme through which employees give up a small percentage of their pre-tax pay in exchange for certain benefits. This reduces the employee’s Income Tax and National Insurance (NI) bill, while the company gets to lower its own National Insurance liability.

An employee’s salary is commonly sacrificed for the following non-cash benefits:

Pension Contributions:

Employees reduce their salaries by the amount of pension contribution they wish to make. This reduction means there is less National Insurance to pay, for both employee and employer. Staff are paid less now, on the agreement their sacrifice goes straight into their auto-enrolment pension.

Note: the employee’s reduced salary must remain above the national minimum wage.

Health insurance:

Staff can give up part of their salary to fund a health insurance premium. It can be a very tax efficient way to fund a health insurance policy. Many small businesses may struggle to afford health insurance premiums for their workforce, but this can be a clever of making it available as it ultimately comes from the employee instead, who in turn makes tax savings and can benefit from a ‘per person’ group discount if other employees enrol through this method.

Childcare vouchers:

Employees sacrifice part of their salary in exchange for registered childcare support and vouchers. These vouchers can be received tax-free up to a certain amount each year. Although the scheme closed to new members on October 4th 2018, employees who joined the scheme on or before that date can continue to remain in it. Alternatively, childcare vouchers have now been predominantly replaced by the government’s tax-free childcare scheme.

Other ways to claim on salary sacrifice:

  • Cycle-to-work schemes
  • Travel expenses
  • Workplace technology and equipment
  • Company car schemes
  • Gym membership
  • Personal learning

Example of salary sacrifice with pension contributions

Salary: £2,500 per month.

Salary sacrificed: £125 per month.

Non-cash benefit received: £125 employer contribution to pension scheme.

Result: Employee take home pay increased by £15 per month due to reduced NI contribution. Employer NI contribution reduced by £17 per month per employee.

[Example from Penfold: What is salary sacrifice? Are you missing out?]

 

Hooray Health & Protection independent benefits brokers specialising in providing FREE advice and guidance to start-ups and SMES. We review schemes, provide price-points, and share our in-depth knowledge on all employee benefits. Contact our friendly team on 01273 222805 or [email protected].

 

What are the benefits to salary sacrifice?

For employees:

  • Lowers National Insurance contributions
  • Lowers income tax liability
  • Allows employees access to more non-cash benefits including benefits they might not otherwise be able to afford
  • Depending on what benefit they receive, they may: improve their financial security, gain access to private healthcare, or reduce travel expenses – all in the most tax efficient way
  • Gives them the power to decide what benefits they want most

For businesses:

  • Reduces National Insurance employer contributions
  • Allows access to a wider range of benefits than they would otherwise be able to afford
  • Benefits made available can be very attractive to potential employees
  • Popularity of benefits can help keep current staff happy and motivated

 

What are the drawbacks of salary sacrifice?

Salary sacrifice can help staff earnings go further. However, it can also have an impact on external things linked to an employee’s salary. Below we have listed a few cons to consider when going for a salary sacrifice scheme.

For employees:

  • Lower take home pay for the employee – which could become a problem if they haven’t budgeted wisely
  • The value of other benefits could be reduced if they are calculated based on salary, such as: bonuses, redundancy pay and life insurance
  • Impact on employee’s credit for borrowing purposes e.g., seeking a loan or mortgage, as gross salary will be lower than actual earnings
  • Reduces employment flexibility as it can be a binding contract for a set period of time
  • Impacts employees’ entitlement to other tax credits e.g., working tax credit, childcare benefits, maternity pay

For businesses:

  • Administrative complexity: For example, employers must ensure all legal requirements are fulfilled and that payroll is correctly adjusted
  • Cost of administration: ongoing administration, communication and employee support can lead to increased man hours and therefore cost – make sure the cost-savings make it worthwhile!

 

Is it time to sacrifice?

As you can see, salary sacrifice can be a smart way of delivering benefits to employees without bankrupting your business. It can also help employees make their pay go further and improve their overall finances. However, it’s highly recommended that you speak to a financial advisor or HR professional to see if it is the right option for you.

When it comes to supporting your staff, there are many other workplace perks, employee benefits, and insurance policies to consider.

At Hooray Health and Protection, we specialise in helping start-ups and SMEs find the perfect employee benefits and health protection plans to support the growth of their business and needs of their staff. We’re well-versed in handling queries for any size business on all topics related workplace perks and staff wellbeing.

Our friendly (and award-winning!) team of experts take the time to listen to your specific needs and eventually tailor a plan that fits uniquely with your staff and business. We bring the best quotes and deals from the UK market, ensuring the best advice and results every time.

Contact us at [email protected] or call 01273 222805 for FREE no-obligation advice and support.

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