Much like the name suggests, a salary sacrifice scheme allows employees to sacrifice part of their salary and receive something else in return – usually in the form of a tax-free, non-cash benefit from their employer. In this article we look at different examples of salary sacrifice schemes, and how to set one up in your workplace. You can find more guides and templates for employers in our resource centre.

How does salary sacrifice work?

A salary sacrifice scheme basically enables an employee to swap part of their salary in exchange for something else. This means that their take-home pay is lower, so both the employee and you as the employer will pay less income tax and National Insurance, but your employee receives a non-monetary benefit to the same value instead.

What are some examples of salary sacrifice schemes?

Some of the most common examples of staff salary sacrifice schemes include:

• Childcare vouchers: These can be received tax free up to a certain amount each year, and used to pay for registered childcare
• Additional pension contributions: Employees make a larger contribution to their pension pot
• Cycle-to-work schemes: Where employees sacrifice part of their salary in order to purchase cycling equipment such as a bike and accessories
• Work-based training: The employee has their training costs met in exchange for giving up part of their salary
• Additional annual leave: Employees ‘buy’ additional leave in return for a portion of their salary

The pros and cons of salary sacrifice

Like everything in life, there are advantages and disadvantages to salary sacrifice (although this usually depends on your own circumstances).

Receiving a lower salary means employees have less income, so they’ll pay less tax and National Insurance if the salary sacrifice is eligible. Not all schemes qualify as being tax-free though, so the benefit the employee receives could instead be classed as a Benefit in Kind and subject to tax.

Reducing an employee’s salary amount also reduces the National Insurance contributions you need to make as their employer, though you’ll still be paying for the equivalent value of the benefit they receive instead.

It could affect an employee’s eligibility for some types of statutory pay

One of the biggest issues is that reducing their take home pay through salary sacrifice can affect an employee’s eligibility for some types of finance or benefits, such as mortgage applications or Statutory Maternity Pay (SMP).

Salary sacrifice can also affect Statutory Sick Pay (SSP), even causing employees to loose their entitlement altogether if their average weekly earnings fall below the threshold to qualify.

If you do decide to offer a salary sacrifice scheme to your employees, it’s important that you make them aware of the potential risks before they agree to anything.

Do I need to deduct tax for salary sacrifice?

This depends on what sort of salary sacrifice scheme your employees are involved in. Some schemes are tax free, so you won’t need to make any deductions for them, such as:

• Payment into a pension scheme and/or pension advice provided by the employer
• Workplace nursery services
• Childcare vouchers (and those provided directly by the employer before October 2018)
• Cycle to work schemes (including bicycles and safety equipment)

It’s a bit different if the employee receives a non-cash benefit which is taxable though, such as a company car or a gym membership. This type of benefit is normally treated as a ‘perk’ – also known as a benefit in kind. Your employee will pay tax (and you’ll make employer’s NI contributions) on its equivalent financial value.

Should salary sacrifice be included in an employee’s contract?

Your employee must agree to participate in a salary sacrifice scheme before joining, and the terms of this agreement should be reflected in their employment contract. It’s also important to ensure that sacrificing part of their salary doesn’t result in your employee earning less than National Minimum Wage.

 
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