What is a Salary Sacrifice Scheme?

With soaring utility bills and the rising cost of everyday spending, the UK cost of living crisis is taking its toll on everyone.

An estimated 9 in 10 UK residents report an increased cost of living, leaving many households changing their spending habits to stretch their income.

The average UK household has seen their costs rise so much that experts estimate that 25% of residents will be unable to pay their bills this winter. The cost of living is a national problem, and many UK workers are looking to their employers to offer assistance.

Many employers will have already considered their employee's financial welfare in light of the ongoing cost of living crisis. Some have provided bonuses, and others have offered discount platforms for employees. Yet, there is more to give employees to help reduce financial anxiety.

Providing access to finance courses and budgeting tools are cost-effective resources that can support employees. These initiatives can improve employees' financial literacy and reduce financial stress without exceeding company budgets. To provide further support, employers must take the next step and offer tangible savings to their employees through salary sacrifice and employee discount schemes.

What must employers do to support employees?

Providing extra financial support comes with benefits for both workers and employers. Financial wellness initiatives can lead to greater motivation, improved performance, reduced turnover and improved wellbeing.

Salary sacrifice is an underutilised and often overlooked financial benefit that employers can implement. Large corporations often provide employees with UK salary sacrifice schemes; However, numerous SMEs (small to medium-sized enterprises) can and should take advantage of this benefit. Taking part in the initiative can grant your employees access to considerable savings that will prove crucial this winter and into 2023.

Salary sacrifice can also help businesses tackle another prevalent issue for most businesses. Staff turnover has been a growing problem in the UK, with turnover rates reaching 15% in 2022. Offering employee benefits is a great way to retain staff, and salary sacrifice is no different. Offering employees the choice to save money each month and receive a non-cash benefit is an effective way to build employee engagement and loyalty.

What is salary sacrifice?

A salary sacrifice arrangement involves employees giving up or 'sacrificing' a percentage of their salary and earning a lower wage in return for a non-cash benefit, commonly in the form of a bicycle, car, childcare or pension contributions.

The premise of salary sacrifice schemes is that employers use the 'sacrificed' money to pay for a non-cash benefit; therefore, employees receive something for reducing their wages.

Employers will often communicate to staff if their benefits package offers any salary sacrifice programs.

How does salary sacrifice work?

Salary sacrifice schemes can sound odd at first, but they can significantly benefit all employees once adopted.

When employees agree to participate in a salary sacrifice program, they meet with their employer to discuss the salary they want to forgo and what benefit they would like to receive in return. Employers must then prepare a new contract for participating employees with their new salary and benefit. The amount of salary employees sacrifice is their choice and can depend on the scheme they are undertaking. However, employers must ensure that the reduced salary does not fall below the minimum wage.

Employees will receive less income each month after the agreement to participate in a salary sacrifice scheme. Consequently, employees will pay less income tax and National Insurance contributions (NIC). Paying less tax is the most significant benefit of this initiative and is where employees can make the best savings. This is especially useful at a time when every penny counts.

Similar to employees, businesses participating in salary sacrifice schemes also pay less national insurance contributions, saving the company money at the same time. The combined financial benefit for employees and employers makes salary sacrifice schemes one of the best and most influential financial benefits companies can offer to their staff.

Am I eligible for salary sacrifice schemes?

The best way to determine if you're eligible for a salary sacrifice scheme is to ask your employer. However, if you're unsure, here's a list of the general criteria you must meet to participate in the scheme.

Employees earn above minimum wage before and after the salary sacrifice
Employees must be permanently employed

Most employees will be eligible for salary sacrifice schemes, providing employers offer the schemes as benefits.

Do I pay less tax with salary sacrifice schemes?

The major benefit of salary sacrifice schemes is the tax savings for both employers and employees. Still, it is often confusing when understanding how salary sacrifice schemes save you money and which schemes offer tax exemptions.

With all salary sacrifice schemes, employers and staff will not have to pay tax on the amount of sacrificed salary. Some employees can take home more than they previously would by paying less income tax and national insurance contributions whilst enjoying their non-cash benefits.

However, this all depends on the chosen scheme and non-cash benefits. For any schemes involving non-cash benefits, employers must calculate the value of the benefit to ensure employers pay the right amount of tax and NI. Employers use HMRC's benefit-in-kind rules to calculate the correct value of non-cash benefits.

Only a handful of salary sacrifice benefits are tax-exempt in the UK.

Pension contributions and pensions advice
Workplace nurseries
Childcare vouchers and employer-provided childcare
Cycling equipment and bicycles (in the form of a cycle-to-work scheme)
Ultra-low emission vehicles (ULEV)

How can salary sacrifice help employees?

Financial benefits have grown in popularity over the past couple of years as employees snub luxury work perks and focus their needs on financial support. Salary sacrifice helps employees save money whilst gaining a non-cash benefit. The scheme is incredibly beneficial for those wanting to purchase a new car, change their commuting habits or want to save more in their pension.

As outlined earlier, employees can save money by reduced income tax and national insurance (NI) contributions. The idea of reducing part of your income may sound counterproductive. But with the non-cash benefit and the reduced tax payment, employees can actually save money. Although the financial benefit is good, many employees are unaware of the schemes and their benefits, especially if employers don't offer them.

Each scheme can offer different benefits. For example, pension contributions can help employees save for the future, whilst cycle-to-work schemes help save money on commuting, helps the environment and keeps employees fit.

Salary sacrifice schemes also enable employees to access certain benefits they previously could not attain. ULEV schemes are prevalent as it gives employees a low-cost route to obtaining an electric vehicle. EVs are becoming more popular as people become more environmentally conscious, and the price of fuel is sky-high.

Salary sacrifice and the cost of living crisis

As more employees struggle to cope with rising costs, schemes such as salary sacrifice become increasingly valuable to employees struggling with their financial wellbeing. Salary sacrifice benefits can help employees who need to make essential purchases in a time of economic uncertainty. If employees purchase a new vehicle through salary sacrifice, they could save money on their vehicle and tax payments, helping them stretch their income further. Employers supporting their staff by offering financial wellbeing schemes can reap the rewards of valued and satisfied employees in the organisation.

Does salary sacrifice benefit employers?

Most employee benefits are advantageous for employers in some way or another. However, salary sacrifice schemes offer employers great benefits as well as employees. The reduced employee salary means that both employees and employers pay less NI.

Organisations are always thinking of ways to reduce outgoing, no matter how small. Salary sacrifice schemes enable employers to save money for each employee taking up the program and benefit from employees' increased satisfaction. r

The reduced tax payment can be significant as more employees adopt salary sacrifice schemes. Businesses with more employees are more likely to benefit from NI savings as more employees can take up the scheme.

Examples of salary sacrifice

The portion of the wage employees gives up is used by the employer to pay for a chosen non-cash benefit. Employees can select a scheme depending on their employer's offering. Organisations can offer any kind of salary sacrifice scheme, from ultra-low emission vehicles to home electronics.

Terryberry offers a selection of valuable schemes by working with trusted suppliers to help employees save money. Below are examples of some salary sacrifice schemes employers can offer.

Salary Sacrifice Car Schemes

With salary sacrifice car schemes, employees are able to lease or buy a brand new vehicle and pay monthly payments straight out of their salary.

Like all salary sacrifice schemes, savings come from reduced income and national insurance contributions. However, as car schemes are not tax-exempt, employees still have to pay tax in the form of benefit-in-kind tax. Although employees still pay taxes on their non-cash benefits, they still pay less than they would without the scheme.

Salary sacrifice car schemes are one of the most popular saving schemes for employees for several reasons.

Affordable Leasing

Employees can enjoy leasing a car for less than they would without a salary sacrifice scheme. Most of the savings on leasing come from reduced tax payments. Still, employees can lease a car for less-than-average financing.

No Deposits

When leasing a car through a salary sacrifice scheme, employees don't have to pay a deposit when purchasing their new car, which means more savings for your employees.

Credit Checks

Employees undertaking salary sacrifice car schemes are usually exempt from credit checks before leasing a vehicle. This is particularly beneficial for employees with poor credit history and allows them to lease a brand-new car.

Ultra-low Emission Vehicles (ULEV)

ULEV offers the same benefits as traditional salary sacrifice car schemes and more. With the added benefits of ULEVs and EVs, employees are starting to choose electric cars over petrol. And there's a good reason for it.

Saving on Fuel

ULEVs and EVs are becoming increasingly popular as the price of fuel and the cost of running a petrol vehicle soars. Electric vehicles are becoming increasingly cheaper to run as charging infrastructure and EV technology improve.

Savings on tax

Like standard salary sacrifice car schemes, ULEVs save employees money by paying less income tax and NI. However, unlike petrol and diesel cars, employees do not have to pay as much tax on their ULEVs.

The tax paid on petrol and diesel cars is calculated by the vehicle's CO2 emissions and by taking a portion of the vehicle's list price. Like traditional vehicles, ULEVs and EVs are required to pay benefit-in-kind tax. However, as EVs produce zero carbon emissions, the benefit-in-kind tax payments are significantly lower.

This means that employees taking part in salary sacrifice car schemes and leasing electric vehicles save more money than petrol or diesel cars.

Helping the environment

It goes without saying when leasing an EV, your impact on the environment is considerably lower than on other vehicles. ULEVs and EVs produce zero emissions, meaning they contribute less air pollution and help to improve air quality.

Car maintenance

Car maintenance is one of the biggest financial burdens for employees across the UK, with many employees unable to afford sudden repairs on a vehicle. A car maintenance scheme is an affordable solution for employees to deal with these unexpected and high maintenance costs. Spreading the cost of payments allows employees to fix the problem now and pay for it later down the line.

As with all salary sacrifice programs, employees can save on their tax payments as employers pay less income and national contributions. Terryberry is proud to offer the UK's first car maintenance salary sacrifice through Halfords. The benefit enables employees to spread the cost of any work their vehicle might need: MOT, service, repairs or tyre replacements. Employees save up to 12% on any work carried out by using a salary sacrifice scheme.

Cycle To Work Scheme

Cycle-to-work schemes fall under the same umbrella as other salary sacrifice benefits. Employees sacrifice part of their salary to purchase a bicycle of their choice. Offering a cycle-to-work scheme can help employees save up to 47% off a new bike and accessories whilst providing employees with extra savings on income and NI contributions. Employers benefit, too, with average savings of 13.8% through National Insurance contributions.

Cycle-to-work schemes offer plenty of other benefits for employees aside from financial savings.

Saving on commuting costs, parking and petrol
Staying fit and healthy
Helping to fight climate change by reducing emissions
Starting a new hobby

Technology and home electronics

Home and electronic salary sacrifice schemes enable employees to spread the cost of electrical and home items over a set period. The payments for the chosen items are taken directly from the employee's salary, so like other schemes, employees can experience savings on their income tax and NI.

Home and electronic schemes allow employees to purchase items from leading home and electronic retailers and pay off the items over a selected period. These salary sacrifice schemes usually take place over 12, 24 or 36 months, making big purchases more affordable.

With a home and electronic scheme in place, employees can purchase the latest in computing, mobiles, home cinema, garden, DIY, furnishings, toys, domestic appliances and much more.

Salary sacrifice disadvantages

Although salary sacrifice offers excellent benefits, some negatives come along with the scheme.

Limited Access

Unfortunately, salary sacrifice schemes aren't available to everyone. Employees are only eligible if their salary before and after the salary sacrifice is above minimum wage. The limit on who can access the schemes means many employees cannot take advantage of the tax savings.

Take-home pay

By now, it should be obvious that when employees take up a salary sacrifice scheme, they will take home less money each month. Although the schemes allow employees to save more from their salary, their take-home pay is still lower than before. This could discourage some employees from taking advantage of the scheme as this could make essential payments and bills more challenging to cover.

Start-up costs

With any kind of employee benefit, there is a start-up cost to participate in the scheme. Salary sacrifice schemes are no different and require a cost to implement the money-saving scheme.

Are salary sacrifices worth it?

Salary sacrifice schemes offer great benefits for employees. No matter what scheme they undertake, staff can enjoy savings on tax payments and a non-cash benefit. Making the schemes well worthwhile for staff.

For employers, schemes offer similar savings, whilst boosting morale, improving retention, and engaging staff.

How to start a salary sacrifice scheme

If you're looking to improve your employee benefits by offering money-saving salary sacrifice schemes, contact us to get started with your own bespoke benefits platform today.