Salary sacrifice as a way to offer benefits to employees has continued to rise in popularity over the past decade or so. The Employee Benefits/Staffcare Benefits research shows that only 9% of employers are in a minority not offering benefits through salary sacrifice arrangements. In comparison, ten years ago 60% of employers had salary sacrifice benefits in place.
2020 threw newer challenges at businesses with budget cuts and profit losses dominating the headlines. The outcome will lead the path for less cost heavy benefits as employers look for alternatives to expensive schemes. And, because salary sacrifice arrangements tend to be cost-neutral it will undoubtedly be a benefits area that will grow even more.
In this article you can discover more about salary sacrifice and how it can work within your organisation. We also consider low-cost employee benefit schemes that provide desirable benefits for your employees, as well as your business.
What is salary sacrifice?
Salary sacrifice is when an employee gives up part of their salary in return for a non-cash benefit from their employer. For example, if an employee wants to purchase a bike but cannot afford the upfront cost, the employer pays for the bike (through schemes such as Cyclescheme) and then takes payment for it by deducting the money from the employer’s salary. Think of it as an interest-free loan if you like. You, the employer, pays for the benefit upfront and then your employee pays you back in small, regular instalments.
How does salary sacrifice work?
Understanding how salary sacrifice works between employees and employers can appear complicated on the surface. However, it’s quite simple really. Your employee receives a salary from you, the employer. However, by offering a salary sacrifice benefit you’re giving them the opportunity to give up some of their salary for an item they want – or a contribution to something, like a pension. The payment for the item (you, the employer, has purchased) is taken from your employee’s salary, before your accounts team transfers their take-home-pay to them.
The reason why salary sacrifice is sometimes called a cost-neutral benefit is because the employer will always be ‘paid back’ for the benefit they provide upfront. Salary sacrifice is a valued benefit in an employee’s eyes because you, their employer, are helping them make outgoing costs more affordable through spread out payments.
Here’s a diagram to help explain the process further:
What benefits can be salary sacrificed?
There was a moment in time when more or less any benefit could be offered through a salary sacrifice scheme. However, in April 2017 the government introduced tighter restrictions which limited the options to benefits such as childcare vouchers, low-emission cars, Cycle to Work initiatives and pension contributions. Other areas not affected by the new restrictions were benefits that enabled employees to buy technology. These benefits remained because they supported the government's Digital Inclusion Strategy goals for the UK.
The top three benefits offered through a salary sacrifice arrangement continue to be for areas that cover childcare, cycling to work and pensions. However, with the ever-changing digital landscape, technology benefits are getting increasingly popular as they’re helping employees afford tech items used every day such as smartphones and tablets.
Is salary sacrifice a good idea for employees?
Salary sacrifice benefits provide many advantages to an employee. The most valued areas of schemes of this type are:
- Employees pay less tax and national insurance
Salary sacrifice payments are taken from an employee’s wage before their tax and national insurance are calculated. It means the final figure the PAYE calculations are based on are lower, resulting in their tax and national insurance contributions being lower.
- The benefits assist their future
Whether an employee decides to take part in salary sacrifice for a pension, a low-emission car or a bike, they take confidence in the fact that these benefits support and secure a healthy, stable and optimistic future for them.
- Everyday items are made more affordable
Employees like that salary sacrifice schemes make high-priced items such as a car, bike or smartphone more affordable by allowing them to spread the cost. Paying for these items in monthly instalments is much more manageable and achievable for most employees than paying one lump sum upfront.
Some businesses worry that salary sacrifice schemes are not good for financial wealth and will result in some employees getting into debt. However, before an employee can take up the benefit it has to be confirmed that the salary sacrifice arrangement will not put their take home pay below the national minimum wage.
How does salary sacrifice benefit an employer?
While the positives of salary sacrifice for employees is quite clear, there can be some confusion over the benefit to the employer. Firstly, in most instances these type of schemes don’t cost employers, they are classed as cost-neutral. Many salary sacrifice schemes are free to set up and because employees are in theory paying for the benefit, albeit in instalments, there are no extra outgoings for businesses to afford.
Companies can sometimes make money by offering their workforce a salary sacrifice benefit too. Employees sacrificing their salary will be paying less national insurance contributions (NICs), which results in employers paying less national insurance. On average an employer contributes 13.8% to employee NICs which means businesses can expect to generate up to 13.8% on savings per employee. For example, if an employee gets a £1,000 bike through their cycle to work scheme, the employer could potentially retrieve back £1,138.
However, the biggest benefit of all for employers is the fact you will be giving your workforce abounding opportunities that they will extremely value. Helping your employees have confidence in a stable future, supporting them with rising everyday costs and showing you care about environmentally-conscious behaviour, is something that will stand out and make staff feel proud to work for you.
How much salary can be sacrificed?
The amount that employees sacrifice is more or less up to them, however it’s important they take into account how much salary they need to be able to afford their everyday living costs. There is also fortunately a cap with salary sacrifice schemes which means employees will not be able to give up their pay if the contributions take them below the national minimum wage. This ensures employees don’t get into financial troubles by taking part in the benefit.
Employees on a higher wage will see more advantages from the tax savings they make through salary sacrifice as their income bracket is higher. That said, every employee can enjoy the advantages salary sacrifice brings as it helps make items and contributions to pensions more affordable by spreading the cost over several months.
What salary sacrifice schemes are available?
The most common salary sacrifice benefits are for low-emission cars, bikes, pensions and childcare. However, everyday-item-related schemes, such as Techscheme, are growing in popularity.
Here are more details about the low-cost salary sacrifice programmes we offer under our employee benefit services.
Cyclescheme is Blackhawk Network’s well-known Cycle to Work scheme that enables employees to obtain a bike with no upfront costs through salary sacrifice. As healthier workforces and reducing carbon emissions have become more important over the past decade, Cyclescheme is a benefit that is valued amongst employees and employers.
Cyclescheme not only allows employees to get a bike or accessories with no upfront costs, but they also save between 25%-39% on their new items too via less tax and national insurance contributions.
The Freedom to Ride initiative was rolled out to enable employees to request Cycle to Work packages of more than £1,000. It means employees now have even more freedom to choose the bike and accessories they want, even higher-cost models such as e-bikes, cargo bikes and specialist adapted cycles.
Employers are proud to offer Cyclescheme as a salary sacrifice, as not only are they supporting their workforce’s health and wellbeing, but they’re encouraging behaviour for a greener planet too. Many employers also agree that staff cycling to work are more productive when they arrive in the office. And, cycling helps relieve stress and boost serotonin levels, resulting in a happier workforce.
You can find out more about our Cycle to Work scheme here.
Techscheme is an employee benefit offered through salary sacrifice that supports the government’s objective to improve the UK’s digital skills and capabilities. While many employees will own tech, they probably won’t own all the tech they need or want, and one of the main reasons for this is cost.
Techscheme allows employees to buy any item of tech from Currys without paying anything upfront, such as a smartphone, tablet, TV or even a smart-doorbell. The cost of the items are then spread across 12 instalments which are taken from the employee’s salary. Employees also save up to 12% on their items as their tax and national insurance contributions will be less.
Offering tech as a benefit will no doubt increasingly grow given how many workforces are now, and will continue to be, working remotely. In fact, a recent Techscheme study confirmed that just 32% of employees felt their current workplace benefits were appropriate for working at home, and almost half (54%) said they believed their benefits needed changing. Listening to employees' wants and needs is crucial when it comes to offering the right benefits, and it seems that making tech affordable is an area workforces are keen to get help with.
Techscheme not only supports workforces with desirable tech wishes, but it can help with affording everyday white goods items too, including washing machines and dishwashers.
If you’d like more information about Techscheme click here.
More of your salary sacrifice queries answered
After exploring salary sacrifice in-depth you may still have questions to help you decide whether offering an employee benefit in this way is right for you. Here are more answers to some common queries, however do get in touch if you’d like to discuss anything we’ve explained in more detail.
Does salary sacrifice show on an employee’s payslip?
Yes, a salary sacrifice contribution should appear on payslips. The sacrificed amount will be shown as a deduction made before tax and national insurance contributions are applied. If your employee’s salary sacrifice is not clear on their payslip, raise the issue with your payroll department to get support in fixing the problem.
Are there any negatives to salary sacrifice?
As payments are taken from an employee’s salary before their pay-as-you-earn (PAYE) calculations, it can affect income figures used to decide maternity pay or mortgage applications. However, the effect on these areas should be minimal as salary sacrifices cannot take final-take-home-pay figures lower than the national minimum wage. If employees are concerned about whether salary sacrifice will affect their bonuses and pay increases, they should be given the opportunity to talk to their employer to clarify every detail before signing up.
Can employees opt out of salary sacrifice?
Before agreeing to any salary sacrifice, employees will sign an agreement that confirms how much they will pay in return for a benefit. They can opt out of the salary sacrifice scheme at any point, however if they still owe money they will be required to make any remaining payments to their employer.
Does salary sacrifice cost the employer?
Salary sacrifice is a cost-neutral benefit. While you, the employer, pays an initial upfront cost for the benefit, because the employee pays you back at the end of the agreement, the cost is neutralised. However, because employers can save on their employees national insurance contributions, organisations can end up making money from salary sacrifice schemes.
Interested in salary sacrifice for your workforce? Fill out the form on the right and one of our employee benefit experts will be in touch.