Salary Sacrifice in the UK: The Ultimate 2024 Guide
Salary sacrifice can seem a little confusing, but it’s a great way for employees to make savings by paying for things directly from their salary. In essence, salary sacrifice works by giving up part of their salary (before tax) to put towards things like a pension or a bike. In this guide, we'll break down everything you need to know about salary sacrifice and how it can benefit you and your team. So, if you’re a People person looking for ways to support your team — we’ve got you covered!
What is salary sacrifice?
Salary sacrifice is when you and your employees agree to give up a bit of their salary towards something that will benefit them. So, instead of getting that money in their monthly pay packet, they'll get something else that's just as valuable!
You might be thinking, why wouldn’t they just buy it?
Well, the great thing about salary sacrifice is that it’s non taxable!
Not only will it lower their Income Tax, but it also reduces their National Insurance contributions. And the best part? Employees don't need to claim for any tax relief from HMRC, as the savings are made immediately.
This is why salary sacrifice is a popular way for people to save for retirement, support childcare costs and buy a bike.
How does salary sacrifice work?
Salary sacrifice schemes are actually super simple. Here are the steps involved:
1 . Agreement
You'll need to first sign up with a partner specialising in the salary sacrifice scheme of your choosing. Both you and the employee have to agree on the amount of salary they're going to give up in return for these specific benefits.
2 . Salary reduction
The agreed upon amount is then taken from the employee's monthly gross salary before tax and national insurance contributions are calculated. Since the salary sacrifice isn’t taxable, both you and the employee will save money on the payments!
3 . Receiving the benefit
Once all the agreements have been signed off, you're good to go and employees will be able to access the benefit. Employees can go ahead and take their company car for a spin, buy their dream commuting bike or start saving for future retirement!
It's important to note that there are some restrictions on the type of benefits that can be provided through salary sacrifice schemes like cars and pensions, as these can sometimes come with extra rules. Plus, not all employees will be eligible for salary sacrifice, deductions must not take the employee's salary below national minimum wage, plus it could impact the employee's entitlement to certain benefits, such as statutory sick pay or redundancy pay.
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Get startedWhat are some examples of salary sacrifice schemes?
There are plenty of options for salary sacrifice schemes in the UK. At Ben, we’ve partnered with a bunch of awesome providers to give you and your team the best deals!
Here are some examples of salary sacrifice schemes top employers are using in the UK…
Pension salary sacrifice
Employees can choose to make contributions towards their pension as part of a salary sacrifice scheme. This is the most common type of salary sacrifice scheme in the UK.
As of 2021, the standard pension contribution in the UK is 8% of an employee's earnings. This should be made up of a minimum contribution of 3% from the employer and a minimum of 5% from the employee.
That said, many companies nowadays boast far more generous pension contributions than the standard 3%. In the UK, a total pension contribution of between 10-15% is typically considered generous.
Some employers offer to match employee contributions, and others offer a set contribution rate that is higher than the minimum e.g., 12% overall.
Some companies already offering great pension contributions include:
- Nestle
- HSBC
- Unilever
- Monzo
- Starling Bank
- Improbable
- Funding Circle
Workplace nursery
A super useful, yet not widely known, salary sacrifice option comes in the form of childcare support.
Given soaring living costs, it’s not financially feasible for most families to forgo childcare, yet childcare costs are skyrocketing too — leaving many parents caught between a rock and a hard place.
A great way to support your employees with childcare is to offer it as a salary sacrifice scheme. This is known as a workplace nursery scheme in the UK.
Some companies have dedicated on-site nurseries, others may select providers for employees to choose from, or another option would be for the employee to source their own provider. The main idea behind the childcare scheme is that they support parents by letting them put part of their salary towards paying for childcare, whilst saving on taxes that would usually come with it.
At Ben, we’ve partnered with Enjoy Benefits — the leading provider of workplace nursery schemes in the UK— to help you secure the best deal for you and your team.
It’s important to note that workplace nursery schemes may come with tax implications for companies, so we recommend doing your research before deciding if this is right for you! But here’s how this scheme has worked for Alicia…
“The nursery scheme I receive through Ben is an absolute game changer, saving us hundreds of pounds every month!”
Cycle to work scheme
Cycle to work schemes are a great option for employees looking to save money on buying a bike. These salary sacrifice schemes mean that employees can pay for a bike over the course of a year, whilst saving on tax.
Cycle to work schemes benefit both companies and employees. From an employee perspective, cycle to work schemes save them money on buying a bike and travel to work, whilst also supporting an active and healthy lifestyle. From a company perspective, cycle to work schemes encourage your employees to be healthier and more environmentally friendly.
Employees can save up to 42% of the cost of a bike & accessories through a cycle to work scheme due to reductions on national insurance and taxable income. However, this amount can vary depending on your tax bracket and the price of the bike. Check out our salary sacrifice calculator for an estimate of your total savings!
Tech Schemes
We all know how much an iPhone costs nowadays…
But you might be surprised to learn that mobile phones and other electrical devices can also be purchased via salary sacrifice schemes. These work by allowing employees to spread the cost of their mobile phone, laptop, TV, or even household items like a washing machine, over a 12 month period as salary deductions.
This means that the tech is delivered directly to employees, and neither the employee nor company has to be credit checked (more on this below). Plus, employees can choose their own network provider and contract separately to the purchase of the device, making it a super stress-free process for everyone involved.
EV Scheme
Much like the cycle to work schemes, employees can purchase an electric vehicle through salary sacrifice. This is a great way for employees to save money on what is usually considered a large & expensive purchase, but it is also an environmentally friendly travel option.
At Ben, one of our partners are Octopus EV who can help employees and companies find the best deals on this salary sacrifice scheme.
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Get startedWhat are the advantages of salary sacrifice schemes to employees?
As an employee, there are a ton of benefits to salary sacrifice schemes. Let’s go through what employees gain from various salary sacrifice options.
Cost saving
The most obvious advantage is the cost-saving aspect of salary sacrifice. Everyday costs like childcare can cause a heavy financial burden for many employees, so receiving a helping hand from their employer can help reduce this stress.
Not only are payments for large purchases like tech devices split over multiple payments throughout the year, but employees can also make tax savings. Using salary sacrifice schemes reduces their taxable income, meaning they’ll pay less in tax and National Insurance contributions.
More benefits
These workplace schemes mean that employees are empowered to purchase large, often expensive items that they might not otherwise be able to afford. As we mentioned, buying new laptops, mobile phones and bikes can seem like expensive luxuries to many employees. Getting a little help from your employer can make a big difference!
Peace of minds
Generous pension contributions can give employees peace of mind that they’ll have substantial and adequate savings for when they retire. Similarly, saving on the cost of childcare will relieve parents of some level of financial worry.
Improved health and wellbeing
Cycle to work schemes are a great way for employees to improve their health and fitness. This, in turn, will have a positive impact on mental health and wellbeing — leading to happier and healthier employees!
Overall, salary sacrifice schemes can provide employees with benefits that they might not otherwise be able to afford, while also reducing their taxable income and leading to potential tax savings. The overall effect of these schemes means that employees are left healthier and happier!
What are the advantages of salary sacrifice to employers?
So we’ve covered why salary sacrifice schemes are great for employees, but what about for employers?
Cost saving
Employers can save money through salary sacrifice because employees get a portion of their pay as non-taxable benefits rather than as taxable income. This means that companies who offer these schemes benefit from reduced payroll tax and national insurance contributions.
Happier employees
Companies who offer great salary sacrifice options can benefit from happier employees as morale is typically higher as a result. Plus, happy employees = more productive employees. One study found that happy employees are up to 20% more productive at work than unhappy ones! The stats speak for themselves.
Increased productivity
Speaking of productive employees… offering benefits like techschemes, gym memberships and childcare vouchers help your team to maintain a healthy work-life balance and juggle family responsibilities with work. This, in turn, leads to increased productivity at work!
A study conducted by Cyclescheme found that a third of employers said that employees who cycle to work are more productive than those who don’t. So, if you’re looking for ways to increase employee productivity, salary sacrifice schemes could be the way to go!
Attract better talent
Salary sacrifice schemes can help attract and retain better talent by offering employees more choice and flexibility with their benefits package.
It’s true that, more so than ever, employees want flexibility. Offering a flexible benefits package can make you stand out from other companies, helping you to attract and secure top talent — even in a war for talent.
Retain talent
Getting employees in the door is one thing, but KEEPING them is a whole other thing…
Having a flexible benefits package which includes salary sacrifice schemes can help you retain talent. If you offer great benefits that meet your employees’ needs, you can massively decrease the chances of them leaving your company.
What are the tax savings for employees?
The amount of tax an employee can save through salary sacrifice depends on their salary and tax bracket.
If an employee is in the basic rate tax bracket and earns £30,000 per year, they will pay 20% tax on their salary normally, coming to £6,000 per year. If they choose to sacrifice £1,000 of their salary to receive a benefit such as childcare vouchers, their taxable income will decrease to £29,000, and they will only pay £5,800 in tax, saving £200!
There are two types of schemes: those that are exempt from Benefit in Kind (BIK) tax and those that are not exempt.
Exempt
Exempt schemes mean employees can save up to 42%, depending on the rate of tax they pay.
BIK tax-exempt schemes include:
- Cycle to Work
- Workplace Nursery
- EV Scheme
- Payroll Giving
Not exempt
Not exempt schemes mean that employees can save up to 12% depending on the rate of tax they pay.
These include:
- Techscheme
- Gym membership
- Car Maintenances Scheme
Please note: These examples are just an estimate. It’s always a good idea to check with a financial advisor or expert for an accurate quote.
Benchmark your employee benefits
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Get startedHow much of your salary are you allowed to sacrifice?
Strictly speaking, there isn’t a specific limit to how much employees are allowed to sacrifice each year. However, there are certain legalities around specific benefits and contributions.
For example, in the UK, an employee can only legally contribute up to £40,000 per year max towards their pension savings (as of 2019). Plus, it’s also important that employees ensure they’re still making above the national minimum wage after accounting for deductions from various salary sacrifice schemes.
Do you need to be credit checked to receive a salary sacrifice benefit?
When it comes to salary sacrifice schemes like pension, EVs, or childcare, an employee credit check is not usually needed. This is because the most important thing is that the employee is eligible for the benefit and that it doesn’t take the employee’s take home pay below the minimum wage.
However, if the particular scheme requires the employee taking out a loan or a mortgage, a credit check may be needed to determine that they can definitely afford to pay back the loan.
It's worth noting that sometimes a credit check is carried out on the employer since they are the ones taking out the loan.
Overall, whether or not a credit check is needed depends on the type of scheme and company policy.
Conclusion
Salary sacrifice schemes are a really cost-effective way for companies to offer their team great benefits. Depending on the particular scheme, employees benefit from tax savings, better benefits and improved wellbeing! Employers also benefit from more motivated and happier employees as well as tax breaks. So salary sacrifice schemes are definitely worth considering if you’re upgrading your benefits package.
FAQs
What are fringe benefits?
Fringe benefits are just another way of saying ‘employee benefits’. They are non-salary related compensation.
What are flexible benefits?
Flexible employee benefits are benefits that let your team choose what works best for them. This could mean they can opt-in and opt out of benefits that you offer them, or they’re given a flexible allowance which they can spend on things they like!
What is ‘Total Rewards’?
Total reward is the combination of all the ways a company invests in their team. Total reward includes employee benefits, compensation, and workplace policies.
Why choose an employee benefits platform?
Employee benefits platforms do the heavy-lifting for you when it comes to negotiating with brokers and benefits providers. Benefits platforms are flexible and automate the employee benefits process.