04 October 2023
Enhancing Employee Benefits with Salary Sacrifice Schemes
Attracting and rewarding employees goes beyond traditional cash remuneration. In today’s competitive job market, non-cash benefits play a vital role in enticing and retaining talent. Salary sacrifice schemes are a valuable incentive that benefits both employers and employees.
What is salary sacrifice?
Salary sacrifice is an agreement between employers and employees to reduce pre-tax annual salary in exchange for non-cash benefits, such as goods or services. Common options include childcare, healthcare, transport, and increased pension contributions. Participation in these schemes is voluntary, giving employees the flexibility to opt in or out as needed.
How does salary sacrifice work?
Before entering an arrangement, both parties agree on the value of the benefits to ensure fair compensation for the reduction in income. However, the salary sacrifice must not dip below the National Minimum Wage rates. Proper HR processes are essential to manage contracts and payroll information effectively.
Available salary sacrifice schemes:
- Cycle to Work: Employees can hire a bike for a defined period, with no value limit, allowing them to purchase it at the end of the term.
- Car Scheme: Employees sacrifice a portion of their salary for a leased car, complete with essential extras, returned at the end of the lease.
- Pension Scheme: Employees contribute a portion of their salary to the workplace pension, increasing employer contributions proportionately.
- Childcare Vouchers: While closed to new applicants, existing participants can sacrifice salary for vouchers to use with registered childcare providers.
Tax and National Insurance implications:
Since salary sacrifices are deducted from pre-tax earnings, employees save on income tax and National Insurance for the sacrificed amount. Employers benefit from reduced employer National Insurance contributions.
Advantages for both employers and employees:
The primary advantage lies in the tax savings for employees. Additionally, salary sacrifice makes high-priced items, like cars or bikes, more affordable through manageable monthly payments. Employers benefit from enhanced staff engagement and retention and saving on tax costs due to reduced employer National Insurance contributions.
Disadvantages to consider:
Salary sacrifice arrangements may impact credit or mortgage applications, and work-related statutory payments could be affected. For car leasing schemes, Benefit in Kind (BIK) tax may apply at the year-end.
Once established, salary sacrifice arrangements create a win-win situation. Besides tax benefits and convenience, they promote savings habits, eco-friendly transport choices, and healthier lifestyles. Employers can tailor the schemes based on employee preferences to foster greater satisfaction and engagement.
Consider introducing salary sacrifice schemes as part of your employee benefits package. Read more at: Salary sacrifice for employers – GOV.UK (www.gov.uk)
For expert advice and support on salary sacrifice schemes and payroll services, reach out to Morrissey Chartered Accountants today. We’re here to help you navigate the best options for your business and employees.