salary sacrifice scheme

Understanding What is a Salary Sacrifice Scheme in the UK?

Although the salary sacrifice scheme may seem odd, it’s a fantastic way for workers to save money by utilising their wages to cover expenses. Everything you need to know about the salary sacrifice scheme including benefits, effects on your pension and what you need to consider first.

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What is a Salary Sacrifice Scheme

Under the government-sponsored salary sacrifice scheme, workers consent to forgo a portion of their gross pay in return for non-cash perks like daycare vouchers, pension contributions, or bicycles. Because the contributed pay is exempt from taxes and NICs, this lowers the National Insurance Contributions (NICs) for both the company and the employee. Employers offer the program to all workers, and participation is entirely voluntary. Increased pension contributions, daycare, healthcare, and transportation advantages are typical perks. The salary sacrifice scheme lowers an employee’s tax obligation by lowering their gross pay, resulting in instant savings without HMRC tax relief. Although this benefits tax savings, it may also affect future earnings, such as when a mortgage application is made. While 85% of large businesses offer salary sacrifice schemes, 41% of SMEs do.

How Does the Salary Sacrifice Scheme Work

In a normal salary sacrifice agreement, you and your employer agree that you will receive a non-cash benefit from your company in exchange for a lower gross compensation. Pension contributions, daycare vouchers, or other incentives like buying a bicycle as part of a cycle-to-work program could fall under this category.

By way of illustration, the employee might consent to a reduction in their gross pay equivalent to their pension contribution. The employer then consents to pay the entire amount of pension contributions in exchange. Therefore, employer-only treatment will apply to any contributions made to the pension plan.

You can sacrifice as much as you like, but it’s crucial to know how your choice will impact each of the following areas:

  • Your present contract with your job determines how much of your compensation you can give up.
  • Various businesses might set limits, and you are unable to decrease your gross payment to less than the minimum wage set by the government.
  • It might have an impact on some of your other employer-provided earnings-related benefits, like income protection and life insurance.

Make sure you don’t go over your annual pension limit.

How to Calculate the Salary Sacrifice?

Salary sacrifice enables you to save money on national insurance while also contributing to your pension. It is easy to follow and demonstrates the advantages of doing this. Results can be computed using a specific percentage of your pay or a predetermined monetary value. This has been revised for the 2024–2025 tax year.

With the Calculator:

  • Enter the gross amount of your yearly salary.
  • Enter the yearly contribution that you make.
  • As well as the one that your employer makes.
  • Employee savings can be converted to pension contributions; choose Yes or No.
  •  Portion of the employer’s national insurance that the employer wishes to keep.
  • Click “Calculate” to obtain the results.

Please be aware that these can be stated as a percentage of your pay or as a monetary sum.

Benefits of Salary Sacrifice Plan

Both employers and employees can profit greatly from the salary sacrifice scheme. The biggest advantage for workers is cost savings because these programs minimise taxable income, which lowers income tax and national insurance contributions. This can help employees save on everyday expenses like childcare, and allow them to afford larger, often more expensive items like tech or bicycles through manageable, tax-efficient payments.

Additionally, by allowing employees to increase their pension contributions, these programs can strengthen financial stability and provide better retirement peace of mind. By encouraging a happier, healthier workforce, they can also enhance employee health and wellness, for instance, by implementing “bike to work” programs.

However, with the rise of non-profit employer organisations, employers may save a lot of money by lowering payroll taxes and national insurance contributions. Employers can save thousands of dollars annually, by offering pensions through a salary sacrifice scheme. Additionally, as contented workers are more engaged and productive, employers can raise staff morale, and boost production.

A salary sacrifice scheme can help organisations stand out in a competitive labour market and attract and retain talent. Since workers are more inclined to stick with companies that provide worthwhile, adaptable perks, these initiatives can help increase employee retention. Employers also save money on business expenses since workers who utilise salary sacrifice to buy vehicles or other products don’t have to disclose corporate mileage, which lowers costs even more.

Disadvantages of the Salary Sacrifice Program

Salary sacrifice schemes lower an employee’s pay, which may impact mortgage and loan applications. Because they are based on average earnings over a predetermined period, they also impact statutory work-related pay, such as statutory maternity pay and statutory ill pay.

At the end of the year, employees who are in a car lease program pay a Benefits in kind (BIK) tax. The BIK tax is probably going to be more than any tax savings from lowering income tax and national insurance contributions unless the leased automobile is an ultra-low emission vehicle (such as an electric car).

High employee turnover can be detrimental for employers. Employers may be required to pay an ongoing monthly salary or an early termination charge if an employee quits while the car lease is in effect.

Situations Where Salary Sacrifice Plan Cannot be Used

The salary sacrifice scheme is not applicable in several circumstances. It cannot be used, for instance, to lower an employee’s pay below the National Minimum Wage. Likewise, a worker’s right to statutory benefits like maternity, paternity, or sick pay cannot be diminished by wage sacrifice. Salary sacrifice has no bearing on the minimum pension payments that businesses are required to provide for qualified workers under the automatic enrolment regulations. Furthermore, salary sacrifice cannot be used to lower redundancy payouts. Finally, a worker’s salary cannot be reduced by salary sacrifice to the point where it violates national insurance or tax thresholds, guaranteeing that the worker still satisfies the minimal requirements for these contributions.

Drawbacks to the Salary Sacrifice Scheme

A salary sacrifice scheme can be a fantastic way for workers to boost their net income and save taxes but it can affect every facet of an employee’s compensation, For instance, it could lower the benefits—like overtime compensation, bonuses, or severance pay—that an employee is eligible for in connection with their income. Additionally, because their overall compensation may appear smaller, salary sacrifice may make it more difficult for an employee to demonstrate their income when applying for a loan or mortgage. Employees can, however, use a letter to explain the agreement to creditors. Reduced flexibility is another possible drawback because salary sacrifice agreements are sometimes set for a set length of time, making it challenging to modify the plan if an employee’s circumstances change. Last but not least, salary sacrifice schemes may have an impact on an employee’s eligibility for tax credits or benefits like child support or the Working Tax Credit since it alters their reported income.

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Conclusion

Companies can provide their employees with significant advantages at a very low cost by using a salary sacrifice scheme. Employees can save money on taxes, receive better benefits, and feel better overall, depending on the specific plan! In addition to tax benefits, employers gain from happier and more engaged workers. Thus, if you’re looking to upgrade your benefits package, salary sacrifice schemes are unquestionably something to think about.