Revealed: 3 important benefits of salary sacrifice for you and your employees

Aside from wages, your company’s workplace pension is the biggest benefit you provide for your employees. Adopting salary sacrifice could be even more beneficial – for you and your staff.

Keep reading to discover how salary sacrifice works and why it could make your business even more tax-efficient.

Salary sacrifice can be an effective way to compensate your workers while being tax-efficient too

Simply put, salary sacrifice – sometimes known as “salary exchange” – is an agreement between your company and an individual employee to reduce the latter’s pay in return for a (usually) non-cash benefit. It requires a change to the terms of your employee’s contract, and can include benefits like:

• Childcare vouchers or workplace nurseries

• Health screening checks or gym memberships

• Cycle-to-work schemes or company cars.

As the employer, you must be clear about the cash and non-cash benefits employees are entitled to and how much these cost.

Generally, where non-cash benefits are being provided, you’ll need to work out an equivalent value and calculate the correct amount of tax or National Insurance (NI). This isn’t the case, though, for all non-cash benefits. Some, including employer pension contributions, don’t need to be valued or reported to HMRC.

One of the most common uses for salary sacrifice is the provision of additional employer pension contributions. Doing so has benefits for both you and your employees.

Here are three of them.

1. Salary sacrifice usually reduces the Income Tax and NI your employees pay

As we have seen, salary sacrifice reduces an employee’s salary, meaning they effectively earn less. This reduces the Income Tax and NI they have to pay, which, in turn, could offset the drop in salary and even see their take-home pay rise.

The full amount of the salary they sacrifice is then paid into their pension by you, as the employer, as an additional employer contribution.

This can be of huge benefit to your employees, helping them to build a more sizeable pension pot as they save toward their dream retirement.

2. The strategy also provides tax benefits for you

Salary sacrifice is useful as an employee benefit because it is tax-efficient for your employee and your business too.

By reducing your employees’ gross pay, salary sacrifice generally lowers the employer National Insurance contributions (NICs) you pay.

NICs are based on staff earnings so the higher your wage bill, the higher your NICs will be. This means that offering salary sacrifice to your highest earners could provide your business with its greatest savings.

You’ll also find that the more staff who sign up for salary sacrifice, the better.

The below table is based on figures from The People’s Pension and shows potential employer savings. It is based on an average employee salary of £25,000, sacrificing the legal minimum contribution of 5% on a qualifying earnings basis, with an employer NICs rate of 13.8% (for 2024/25).

As you can see, salary sacrifice could pay for itself quickly, while offering huge potential savings for your company.

And remember, this is based on an average salary of just £25,000. With higher salaries, the savings could be much greater.

3. You can channel NI savings back into your business

Salary sacrifice allows you to offer an improved benefits package to your employees. You can read more about the three top reasons to improve your employee benefits package here, but they include retaining experienced staff and attracting the best new talent.

You can also use NI savings to directly help your business, by reinvesting the money back into your company.

These additional funds could prove invaluable, whether they are used to purchase new equipment, expand your offering, or to market more widely.

Clear messaging around the important factors to consider is key to encouraging take-up

If your employees aren’t familiar with the concept of salary sacrifice and its benefits, you might find that you need to sell them. After all, asking employees to “sacrifice” part of their salary might not be immediately appealing.

Clear and concise communication will help here. Ensure your workers fully understand what they’re signing up for, including the main rules and some of the perceived downsides.

Factors to consider

From your point of view, remember that salary sacrifice mustn’t reduce your employee’s salary to below the current minimum wage. From 1 April 2024, this is £11.44 an hour for those over 23. It also can’t take earnings below the lower earnings threshold for auto-enrolment.

Your employees, meanwhile, will need to be aware of several key points.

Saving for the future is a bedrock of sound financial planning and pensions are incredibly tax-efficient. Salary sacrifice allows your staff to save more for their future, but they’ll need to consider the Annual Allowance. It stands at £60,000 for the 2024/25 tax year and includes personal and employer contributions, as well as tax relief.

Perceived downsides

A reduction in gross salary is often thought to affect affordability for loans, such as mortgages. While earnings will be included in mortgage affordability tests, salary sacrifice is generally acknowledged by lenders and is unlikely to mean employees can borrow less.

Some state benefits, like the State Pension, could be affected if an employee’s salary falls below the level for NICs. You might also offer benefits like death in service, based on salary.

Expert financial advice can help to ensure continued eligibility for state benefits, while a comprehensive package of benefits, with providers who take salary sacrifice into account, should ensure your employees remain protected.

Get in touch

Salary sacrifice can be hugely beneficial for you and your employees, but your staff will need to understand what they’re signing up for. If you’d like more information about moving to a salary sacrifice arrangement for your employees, be sure to speak to Parker FA’s team of experts. Contact us to talk about what we can do for you.

Please note

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

A pension is a long-term investment and the value is not guaranteed. Any advice or considerations are personal to each individual’s circumstances. Levels and bases of, and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. Advice on auto enrolment pensions is not regulated by the financial conduct authority. Workplace pensions are regulated by The Pension Regulator.