Salary sacrifice is a Government-backed initiative designed to help both employers and employees reduce their tax liabilities. Through this arrangement, an employee agrees to exchange a portion of their salary for non-cash benefits, which results in a lower gross salary. Consequently, both the employee and employer pay reduced National Insurance contributions (NICs).
Why Salary Sacrifice Is Key Amid Rising NI Costs
Changes to National Insurance (NI) were announced during the 2024 Autumn Budget and are set to have a big impact on employers across the UK in 2025. Chancellor Rachel Reeves disclosed employer NI contributions will rise, while the earnings threshold at which employers start paying NI will drop, starting from the 2025/26 tax year. As a result, salary sacrifice has taken on renewed importance as a strategic way to offset these rising costs while helping employees grow their pension savings.
Benefits of Salary Sacrifice
Employee Benefits:
- Lower National Insurance contributions: Employees benefit from reduced NICs, allowing them to keep more of their earnings.
- Lower tax liability: By reducing their taxable salary, employees can lower their overall income tax burden.
- Access to valuable benefits: Employees can receive non-cash benefits that they might otherwise struggle to afford.
Employer Benefits:
- Reduced National Insurance costs: Employers save on NICs because the sacrificed salary is not subject to these contributions.
- Enhanced employee satisfaction: Offering salary sacrifice can improve employee retention and job satisfaction, as it is often seen as a valuable workplace perk.
- Competitive recruitment edge: Employers who provide salary sacrifice schemes can attract top talent by offering a more comprehensive benefits package.
Common Non-Cash Benefits
A range of non-cash benefits can be used in salary sacrifice arrangements, including:
- Pension contributions: Employees can contribute more to their pension while benefiting from tax and NIC savings.
- Cycle-to-work schemes: Employees can acquire bicycles and accessories through salary sacrifice.
- Childcare vouchers: These can be used to pay for registered childcare services, up to a tax-free limit.
Salary Sacrifice and Workplace Pensions
One of the most common uses of salary sacrifice is contributing to workplace pensions. Instead of receiving a portion of their salary, employees agree to have this amount directly added to their pension fund. This approach lowers their take-home pay but increases their retirement savings while reducing their tax and NIC liability.
Employers can implement a salary sacrifice scheme by modifying the terms of an employee’s contract, requiring the employee’s consent. This arrangement is a straightforward way to minimise tax costs while enabling employees to retain more of their earnings.
Employers using salary sacrifice should take specialist employment advice on how best to adapt employment contracts. For further details, please contact Dixcart Legal: hello@dixcartuk.com.
When Salary Sacrifice Cannot Be Used
There are limitations to salary sacrifice arrangements, including:
- Tax and NIC limits: The arrangement cannot lower an employee’s pay below income tax or NIC thresholds.
- Minimum wage restrictions: An employee’s salary cannot fall below the National Minimum Wage after salary sacrifice.
- Pension auto-enrolment compliance: Employers must still meet the minimum pension contribution requirements.
Considerations Before Opting for Salary Sacrifice
While salary sacrifice provides significant financial advantages, it may impact elements linked to an employee’s salary. Important factors to consider include:
- Effect on other benefits: Overtime pay, bonuses, and redundancy calculations may be affected.
- Loan or mortgage applications: A lower gross salary may impact affordability assessments for lenders, though a confirmation letter from the employer can help clarify earnings.
- Reduced flexibility: Salary sacrifice agreements may be binding for a fixed period, limiting employees’ ability to adjust their finances.
Summary
Employees should ensure that any salary sacrifice arrangement is clearly documented in their contract. Frequent changes between salary and non-cash benefits could also impact tax and NIC advantages. By understanding the terms and long-term benefits, both employers and employees can make informed decisions about salary sacrifice schemes.
If you have any questions and/or would like advice on the above topic, please contact us at: hello@dixcartuk.com or your usual Dixcart contact.
