Salary Sacrifice Schemes
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Salary sacrifice schemes for small businesses

Posted on 26th June 2024
Have you considered salary sacrifice benefits for your employees? 
 
Your employees can exchange part of their pre-tax pay for other benefits. This can reduce income tax liabilities and National Insurance (NI) contributions for both employers and employees. There are a lot of options to choose from. Here are some things to think about. 
Employers of any size can operate a salary sacrifice scheme. You can help employees save for their pension or pay for transport by deducting the cost from their pay. However, you should explain how their employment contract will change and how their sick pay and holiday pay is affected. 
 
Some benefits from schemes like these are non-taxable such as extra private pension contributions and advice, childcare provided by you, or bicycles. Your employees can opt in and out of schemes and change their contributions with your agreement. 

How salary sacrifice schemes work 

As an employer you can choose a salary sacrifice scheme and offer membership to your employees. You must agree the cash value of the benefit with them and their pre-tax pay will change accordingly. You must also make sure that deductions for the scheme don’t take someone’s pay below the National Minimum Wage. 
Once your employee signs their agreement to be part of the scheme their contribution is deducted from their gross pay and they can start receiving the benefit. 

Limitations on salary sacrifice schemes 

Salary amounts exchanged for benefits in a salary sacrifice scheme aren’t limited. However, it’s important that the amount employees pay is affordable. They need to have enough left to pay their bills and to contribute to their pension. If an employee wants to apply for a mortgage lenders will look at their pay after salary sacrifice deductions. Reduced pay can also affect salary-related maternity benefits, for example. 

Types of salary sacrifice scheme 

Cycle to Work Scheme. An employee can choose a bike and you can buy it and lease it to them for a monthly hire charge. You won’t pay VAT on the bike and you can pass this saving on to your employee. When the hire period ends your employee can buy the bike from you at a ‘fair market value’. 
 
Childcare. The option for tax-free childcare vouchers ended in 2018. However, you can still offer an in-house workplace nursery scheme or work with an external provider. 
 
Car leasing. Your employees can use salary sacrifice for a lease car. However, they will pay Benefit in Kind (BIK) tax at the end of the year. Depending on the type of car they could pay more BIK tax than they save on income tax and National Insurance. You wouldn’t own the car. Instead, your employee will lease it from another company and return it at the end of the lease. 
 
Technology. Employees can spread the cost of smartphones or laptops over the year through salary deductions. This is a taxable benefit but can help employees manage their finances. 
 
Healthcare. You can offer health insurance, gym memberships or mental health services as salary sacrifice options. This is taxable but can help improve work-life balance and employee retention. 

Choosing a salary sacrifice scheme 

Your choice of scheme will depend on your employees’ preferences. If you employ a lot of parents with young children a childcare scheme might be a good choice. Healthcare benefits could suit older employees. It’s best to consult with them to find the best options, and to decide how employees can opt in and out. It’s also worth checking HMRC’s guidelines for compliant schemes and which legal rules apply. 

Tax implications for salary sacrifice schemes 

For some schemes income tax and NI isn’t paid on the salary your employees give up. The amount of tax savings will depend on your employees’ pay and tax code. 
 
For taxable benefits like private health insurance the corporate rates you receive might still make the benefit worthwhile. You must declare taxable benefits on the HMRC form P11D for your employees each year. 

Employee motivation 

If you’re finding it difficult to recruit new employees or to keep people on board a salary sacrifice scheme might help. An attractive employee benefits package can attract good candidates. A well designed scheme can improve employee engagement and help build a positive and motivated workforce. 

Is a salary sacrifice scheme right for your business? 

There are pros and cons to offering an employee salary sacrifice scheme. Employer NI contributions are reduced and staff retention can improve. However, the scheme must be administered and if an employee leaves you might have to pay termination costs for their agreement. 
 
Your employees can use a salary sacrifice scheme to build up their pension savings, for example. They can receive extra pension tax relief and their income tax and NI contributions go down. However, salary-related benefits and loan applications are affected by their lower income. Lower paid employees might feel excluded if they can’t afford to sacrifice any of their income. 
 
Please get in touch if you would like to find out more about the financial implications of a salary sacrifice scheme for your employees. 
 
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