How to save money while delighting your employees through salary sacrifice 

Since October’s budget that announced the increase in Employers’ National Insurance contributions and the rise in National Minimum Wage, the cost of being an employer is risen dramatically. While the media is full of doom and gloom stories about what this means for the economy, there are practical steps that employs can take to make their budgets go further. 

Unless you are hiking up your prices, you need to look at how to save money to offset the increases. One key way to mitigate these costs is through salary sacrifice schemes, which can be a real win: win, offering tax-efficiencies for businesses and desirable benefits for your people that boost employee engagement and talent retention. If you’re not already exploring these schemes, it’s time to take a closer look.   

What is salary sacrifice?   

At its core, a salary sacrifice scheme allows an employee to give up part of their pre-tax salary in exchange for a non-cash benefit. Because the sacrifice is made before tax and National Insurance (NI) contributions are calculated, both the employee and the employer can enjoy significant tax savings.   

The benefit of a salary sacrifice scheme for employers   

Let’s start with the business case. Salary sacrifice schemes aren’t just about being a great boss—they can have a tangible impact on your bottom line and in light of the recent budget’s increase in employer contributions to National Insurance, this is a key area to consider. 

Lower employer NI contributions.

You pay less National Insurance on the reduced gross salary, which can add up to substantial savings and free up cash.   

Attract and retain talent.

Offering schemes like this is part of your employer value proposition (EVP) that makes you a more attractive employer and helps you to compete in a tight labour market.   

Cost-effective employee perks.

Many schemes allow you to offer benefits that feel significant to employees without a huge outlay from the business.   

Boost morale without pay rises.

You can provide financial and lifestyle benefits that make employees feel rewarded and valued, even when it is difficult to increase salaries.   

The benefit of a salary sacrifice schemes for employees   

For your team, salary sacrifice schemes provide access to valuable perks that might otherwise feel out of reach, as well as helping them to save money.   

Tax and NI savings.

Employees pay less tax and NI on their reduced salary, leaving more disposable income in their pocket.   

Affordable perks.

Salary sacrifice can make things like electric vehicles, gym memberships, or additional pension contributions more accessible.   

Lifestyle benefits.

Employees can improve their quality of life while keeping more of their earnings.   

Popular salary sacrifice schemes   

There are plenty of options to choose from, depending on what you want to offer your team. Here are a few favourites:  

Pension contributions  

Perhaps the most well-known scheme, this allows employees to boost their pension pot while saving on tax and NI. For people whose earnings are close to a tax bracket barrier, an increase in pension contributions can ensure that they remain in the lower tax bracket, saving them a considerable amount of tax. Employers can also contribute more without increasing payroll costs 

Electric Vehicle Schemes 

With the rise of EVs, many employers are offering company cars through salary sacrifice. Employees have the ability to drive a brand-new electric vehicle out of a showroom at a lower monthly cost than they’d find on the open market; the tax saving is the icing on the cake. 

• An employee paying the basic rate tax and financing an electric vehicle through a salary sacrifice scheme, would save £1,920 annually (Tax saving of 20% = £1,200 + National Insurance saving of 12% = £720).  

• An employer with 25 people on an EV scheme would save £20,700 on their National Insurance contributions (13.8% of £150,000) 

 Cycle-to-work scheme  

Employees can save on the cost of a bike and accessories while spreading payments over time.  

• An employee in the basic rate tax bracket buying a bike worth £2,000 through a salary sacrifice scheme, would save £640 (Tax saving of 20% = £400 + National Insurance saving of 12% = £240).  

• An employer with 7 people purchasing a £2,000 bike on the cycle-to-work scheme would save £1,932 on their National Insurance contributions (13.8% of £14,000) 

Cycling has a significant impact on life expectancy and the overall health of your team. Research shows that commuting by bike is associated with a 20% reduced risk of early death compared to driving, as well as being good for sustainability goals. The physical benefits involved in cycling are great for mental well-being, cardiovascular health, weight management helping keep your people happy and healthy.

Health and wellbeing benefits  

From gym memberships to private medical insurance, salary sacrifice can make these benefits more affordable and appealing to employees.   

Tech scheme

Employees  can purchase items such as laptops through a scheme that enables them to save NI contributions. Employers do not reduce their contributions through this scheme, however, it is still a good scheme to put in place, as it allows your people to keep up to date with technology.  

Is there a catch?   

While salary sacrifice schemes are generally a win-win, there are a few things to watch out for:   

Impact on statutory benefits.

A lower gross salary can reduce things like statutory maternity pay or company pension contributions, so it’s worth ensuring employees understand this trade-off.   

Admin requirements.

Setting up a scheme requires some initial effort, but once it’s in place, the ongoing management is typically straightforward.   

Compliance is key.

HMRC has clear rules about what qualifies as salary sacrifice, so it’s important to get advice and set things up correctly.   

How to get started   

Implementing salary sacrifice schemes isn’t complicated, but it does take a little planning. Here are the first steps:   

Identify your goals.

Are you looking to reduce costs, offer greener perks, or improve employee wellbeing?  choose a recommended adviser and allow them to do a review of your existing schemes. 

Get expert advice.

A good People Director understands who the appropriate advisers are and can ensure everything is set up correctly and in line with the latest regulations 

Choose your schemes.

Review your current benefits and pick options that align with your workforce’s needs and your business goals. 

Communicate clearly.

Employees need to understand how the scheme works and what the benefits are for them, so  a People Director can work alongside a benefits adviser to create an internal communication plan.   

A smarter way to reward   

Salary sacrifice schemes offer a unique opportunity for you to save money, enhance your employee value proposition and boost employee engagement at the same time. By reducing tax liabilities for both you and your people and offering meaningful benefits, they’re a smart solution for businesses looking to get the most out of their payroll budget and attract the best people.