We like to call it salary benefit rather than salary sacrifice, here’s why…
Salary sacrifice is where an employee agrees to have their salary reduced in return for some form of non-cash benefit. This enables employees to tailor their salary package in a way that meets their work and life balance and reduces the amount of tax and national insurance they have to pay.
There are a variety of schemes employers can choose to implement such as:
- Childcare vouchers
- Cycle-to-work schemes
- Healthcare provisions
- Buying/selling annual leave
- Pension provisions
- Corporate gym membership etc.
What’s the benefit for employers?
The main advantage to employers for implementing salary sacrifice schemes are the savings they make in National Insurance Contributions (NICs). Employers pay NIC contributions on employees’ salaries but benefits such as childcare vouchers or pension contributions are exempt.
So, the higher the salary, the more the employer has to pay in NICs, therefore reducing the employees' salaries, in return for other benefits, would allow the employer to pay less in NICs. The savings for an employer can be considerably large given that the scheme is adopted by a number of employees throughout the business.
Employees will also be financially better off as they pay less tax and NIC on their salaries and will have more money to spend on things they enjoy resulting in happier and more productive teams.
Further benefits such as improved employee health through cycle-to-work schemes or corporate gym membership may result in less sick days therefore improving performance and productivity in the workplace, not to mention improving the general wellbeing of your employees!
What do employers have to do?
As an employer you do not need to report salary sacrifice to HMRC, instead you must make amends to employees’ contract and clearly communicate these changes to them.
After meeting with your employees to discuss certain sacrifices you must revise the terms and conditions of employment between you and your employee, it must state that your employee is entitled to a lower cash payment as a result of a sacrifice.
The newly amended contract must refer to the benefit being given in exchange for the sacrifice. It is important to remember that salary sacrifice must not reduce gross pay below the national minimum wage.