What employee benefits are available via salary sacrifice?

A salary sacrifice scheme lets employees give up part of their salary in return for non-cash benefits. Employers can offer salary sacrifice schemes for various employee benefits and allow employees to choose which benefits they want to access.

A salary sacrifice scheme is a contractual agreement between your company and an employee where they agree to give up part of their gross salary in exchange for their chosen employee benefits. By reducing an employee's gross salary, salary sacrifice reduces their taxable income, meaning they pay less income tax and national insurance.

As an employer, you must ensure your salary sacrifice scheme complies with relevant legislation and tax and national insurance rules. Regulations differ depending on the type of benefit offered, so you must ensure you're up to date with the tax and national insurance arrangements and seek professional advice if needed.

A salary sacrifice scheme can include various workplace benefits and help your business and employees save money on valuable benefits and their tax and national insurance contributions. A high-quality benefits package helps your business attract talented staff, improve employee retention and morale, and support your team's well-being.

Recent research found that 48% of UK employers use a salary sacrifice scheme to reduce their National Insurance contributions, with 12% using the savings to fund their employee benefits platform. Therefore, a salary sacrifice scheme could enable you to broaden the employee perks your company provides.

Here are some key benefits of a salary sacrifice scheme for you and your employees.

Reduced income tax payments for employees

Salary sacrifice reduces an employee's gross salary, meaning their taxable income is lower than before. Employees, therefore, pay less income tax and national insurance, which can help them save money and increase their take-home pay. Payments paid via salary sacrifice are often expenses that would otherwise come from an employee's net salary. For example, a salary sacrifice scheme can help with childcare costs. Paying them using salary sacrifice can offer significant savings. It also gives parents peace of mind, knowing that those expenses have been dealt with before they receive their take-home pay.

We'll discuss the potential disadvantages of salary sacrifice later. Still, it's a good idea for employees to seek financial advice and consider the tax and national insurance implications before signing up. If you provide staff with an Employee Assistance Programme (EAP), their telephone helplines can signpost employees to confidential third-party financial advice.

A tailored benefits package

A good quality employee benefits platform goes beyond statutory benefits to provide perks employees will value. You can provide company-funded benefits after conducting appropriate research to identify those your employees will likely value most.

However, flexible benefits let your team choose benefits that provide the support they need and design a tailored benefits package. Many employees opt into a salary sacrifice scheme to access flexible non-cash benefits based on their priorities and circumstances. For example, cycle-to-work schemes may be ideal for employees who live relatively close to work and reduce their commuting costs, but they will be unsuitable for others.

Enabling employees to design a tailored benefits package demonstrates your commitment to meeting their needs.

Well-being benefits

Depending on the benefits you offer, salary sacrifice can provide direct access to well-being benefits such as mental health support, private healthcare, or increased physical activity through discounted gym memberships or a more active commute. These enable your team to care for their physical and mental health. Your business will also benefit from having healthier employees who are more productive and have fewer sickness absences.

Financial stress can also significantly impact employee well-being. A salary sacrifice scheme can help by increasing employees' take-home pay, helping them save money on essential expenses or boosting their retirement savings.

Reduced National Insurance contributions

Changes to National Insurance mean that the cost of employing people has risen. Where employers previously paid 13.8% on salaries above £9,100 per year, businesses must now pay 15% on wages over £5,000. This increases the rate and means companies must pay National Insurance for more part-time workers.

A salary sacrifice arrangement can bring cost savings by reducing your employer's national insurance contributions. A salary sacrifice scheme reduces employees' gross salary. You only pay National Insurance contributions on their net pay, meaning the arrangement reduces contributions for you and your team.

A salary sacrifice scheme can't provide corporation tax savings, as only employer-funded benefits can do that. It's therefore worth looking at other benefits to offer a comprehensive package and to ensure you take the most tax-efficient approach.

Salary sacrifice can provide a broad range of benefits. Some, such as a workplace pension, are compulsory. A salary sacrifice arrangement lets employees control how much they want to pay into their pension, subject to statutory minimum payments.

Other benefits are optional, meaning employees can design a tailored benefits package to suit their needs and circumstances. Here are a few examples of the benefits your business can provide using a salary sacrifice scheme. The rules on income tax and national insurance contributions vary depending on the benefit offered and other details, so always seek professional advice to understand what tax savings are available and the steps you must take regarding national insurance contributions.

Pension contributions

Workplace pensions are now a statutory requirement, with eligible employees automatically enrolled into their company's pension schemes. Employers must pay a minimum of 3% of an employee's salary, with total minimum pension contributions being 8%, meaning employees must contribute at least 5% of their wages. These are minimum contributions, meaning employees can decide to put more of their salary into their pension contributions. Your business can also pay more by offering pension contribution matching up to a specified percentage.

A salary sacrifice arrangement lets your employees lower their gross salary and pay into their pension before receiving their net pay. Legal experts have advised that salary sacrifice may not benefit low-paid or part-time staff as it can impact their NI contributions and mean they don't pay enough to receive their state pension.

The national minimum wage has also increased, but the threshold for automatic enrollment into a pension scheme has remained at £10,000 for several years, meaning more employees are now eligible. As we've seen, salary sacrifice can offer tax savings and increase net pay, but pay must remain above minimum wage.

In those circumstances, consider increasing low-paid employees' salaries to ensure their pay after salary sacrifice remains above the minimum wage, or consider an alternative to salary sacrifice for pension contributions.

Childcare support

Until 4th October 2018, the childcare voucher scheme enabled parents to pay nursery or holiday club fees using a salary sacrifice scheme, with the government topping up the amount depending on their tax bracket. The scheme is now closed to new applicants but is still available to employees who joined beforehand, as long as your company still runs the scheme.

The Workplace Nursery Scheme offers an alternative to childcare vouchers and also uses salary sacrifice. Your business partners with a nursery or another registered childcare setting and pays a monthly fee. You can partner with multiple settings according to your employees' preferences. The National Insurance savings are usually equivalent to the monthly fee you pay to each nursery, which is worth bearing in mind when considering the tax implications of offering childcare vouchers via salary sacrifice. The scheme is also only available to parents with children aged five and under.

Parents with older children, up to 11 years old, can register to pay into a tax-free childcare account. The scheme tops up childcare payments to increase the amount parents have available to pay for childcare. A basic-rate taxpayer can pay 80% of their nursery fees into the account and receive a 20% top-up. If a salary sacrifice arrangement with a monthly fee doesn't make financial sense for your business, consider signposting staff towards tax-free childcare instead.

Childcare vouchers are a great example of a tailored benefit that will be extremely valuable to some employees but not all.

The cycle-to-work scheme

Cycle to work schemes are ideal for employees with relatively short commutes, or for those who can cycle for part of their journey, for example by cycling to the station before getting onto a train. The scheme uses salary sacrifice to pay for a bike in monthly instalments. It can also include the cost of safety equipment such as a helmet or reflective clothing.

Your employees can include any bicycle or tricycle as long as it isn't motorised. It means your employees can choose a bike they can use for their commute and in their spare time or a folding bike if they're travelling part of the way on public transport.

Various registered providers offer cycle-to-work schemes, and your business must register with one to offer salary sacrifice to pay for a bike. You can find out more about implementing a cycle-to-work scheme here.

Electric vehicles

Your employees can use salary sacrifice to pay for a car, but the tax implications vary depending on the type of vehicle they choose. The tax rules changed in 2017, and HMRC now treats a car purchased using salary sacrifice as a benefit in kind. Your employees now need to pay income tax and national insurance contributions on the value of the vehicle or the amount of salary they've sacrificed, meaning they lose the tax advantages of the salary sacrifice scheme. They may decide it's worthwhile if it lets them buy a vehicle and pay in instalments rather than taking out a car loan or hire purchase agreement, which will attract interest payments and may need an initial deposit. It can also help your business make car ownership more accessible to employees, which could have business benefits.

The tax changes don't apply to ultra-low emission vehicles, such as electric cars, to encourage increased take-up of more environmentally friendly transport. The exemption applies to vehicles which emit 75g of CO2 per kilometre or less. The rules also vary for lower-emission cars that don't meet these guidelines, so it's worth signposting your employees towards professional advice to help them consider their options.

Health insurance

Health insurance is a highly valued employee benefit your business can invest in to provide your team with quick access to private healthcare. Business health insurance premiums are an allowable expense for corporation tax purposes, meaning they can help you reduce your tax bill. However, HMRC treats employee health insurance as a benefit in kind, and your employees pay additional income tax on the value of the benefit.

You can offer health insurance as a voluntary scheme, where employees pay the premiums if they want to join the policy. Group health insurance premiums are typically lower than individual policies, as your insurers can spread the cost over a larger group of people, making health insurance more affordable and accessible. If you take this approach, you can use salary sacrifice to collect payments.

Salary sacrifice arrangements provide savings on your employees' income tax and national insurance contributions and reduce the cost of your employer's national insurance contributions. We've discussed the benefits of salary sacrifice schemes for increased employee retention, productivity and well-being.

However, there can be disadvantages depending on your employees' needs and your company's circumstances. Both you and your employees should seek financial advice before setting up a salary sacrifice scheme, deciding to join and considering which benefits to choose. As an employer, you have a duty of care towards your employees and should carefully consider the potential downsides when deciding whether to offer salary sacrifice.

Understanding salary sacrifice eligibility rules and tax implications

We've discussed the benefits your employees can access using a salary sacrifice arrangement and some potential limitations. For example, salary sacrifice may not be the best choice for part-time staff and those on lower wages when paying their pension contributions. As an employer, you must ensure that a salary sacrifice scheme doesn't take an employee's earnings below the national minimum wage and also consider the impact on their lifetime national insurance contributions. When introducing a salary sacrifice scheme and promoting the benefits, consider ways you can support your team to seek independent advice.

Different rules apply to each benefit, and you must ensure your employees have adequate information to make an informed choice. The tax implications of salary sacrifice can be complex, depending on the chosen scheme. Some arrangements, such as car purchases or cycle-to-work schemes, operate as leases, meaning your staff don't own the vehicle or bike at the end of their salary sacrifice period without making alternative arrangements or paying an additional amount.

Understanding their eligibility, the tax and financial implications and the scheme's outcome can help your team make an informed choice.

It can impact employees' entitlement to benefits and loans

Participating in a salary sacrifice scheme can affect an employee's entitlement to state benefits or other work-related statutory payments. In some cases, this can be positive. Working and child tax credits have been discontinued, but previous claimants may be eligible for Universal Credit, where lower taxable income can increase an employee's entitlement.

However, it can also reduce employees' entitlement to other benefits and financial services.

Statutory redundancy pay

Employees are entitled to statutory redundancy pay, which is calculated based on an employee's salary, age and length of service. If a salary sacrifice arrangement significantly reduces their wages, they'll receive less in their final payment should they be made redundant, when they'll likely need a financial safety net.

Statutory maternity pay

Statutory maternity pay during maternity leave pays 90% of an employee's average weekly earnings for the first six weeks, then £187.18 or 90% of their average weekly earnings for another 33 weeks, whichever figure is lower. Your business can lessen the impact by offering enhanced maternity pay if you can.

Sick pay

Statutory sick pay is a minimum of £118.75 per week. However, if your business pays additional sick pay, for example, using income protection insurance, this is calculated as a percentage of an employee's annual salary, meaning lower payments.

Death-in-service benefits

Death-in-service benefits are typically backed by group life insurance you provide your employees. Policies pay a lump sum equivalent to a multiple of their salary if an employee dies while employed by you. The payment goes to their chosen beneficiaries, usually their spouse or a family member, to help cover the costs of an employee's family responsibilities when they're no longer around. A reduced salary means a lower payment.

Mortgage lending

If an employee intends to apply for a mortgage or remortgage, the lender will consider their financial situation, including their salary and the overall affordability of the proposed lending. Most mortgage lenders offer multiples of an employee's current salary, so their ability to borrow will be lower.

Increased administration time and cost for employers

Operating a salary sacrifice scheme requires significant administration, such as ensuring that payroll services process payments and deductions and that tax and national insurance are paid correctly.

As we've discussed, you must also ensure your employees have sufficient information and resources to make an informed choice about participation in a salary sacrifice scheme.

At Globacare, we help our clients choose the right insurance products to provide a comprehensive and high-quality employee benefits package. Contact us for advice tailored to your business.