IT IS imperative today that businesses provide their employees with an enticing all-around package, including a good salary and a number of other benefits, financial and otherwise. Benefits include things like paid leave, maternity and paternity packages, and flexible working hours. However, one of the more popular forms of benefit is salary sacrifice schemes, which can take a few different forms. Let’s take a look.
Salary Sacrifice Schemes Explained
A salary sacrifice scheme is essentially an agreement between an employer and an employee which reduces their taxable salary in exchange for a non-cash benefit like goods or services. The most common salary sacrifices tend to be childcare, transportation, pensions, and healthcare. The schemes themselves also tend to be voluntary, for the most part, so while they are usually offered to all employees, they need to opt-in to access them.
Firstly, the parties will need to work out the cash value of the benefits in order to ensure that the employee is going to be fairly compensated for the loss of income that they are going to incur by opting into the scheme. An employee’s wage cannot be reduced below the national minimum wage, which is why a lot of businesses have to cap deductions. Oftentimes, this will mean needing a good HR department and payroll team.
Salary Sacrifice Examples
There are a few classic examples of salary sacrifice schemes. Firstly, the cycle-to-work scheme whereby an employee can hire or purchase a bike through the business. Currently, there isn’t a limit to the value, although individual businesses can decide to cap it. If the bike has been hired, at the end of the agreement, the employee can rehire the bike, give it back or purchase it.
Next, cars, employees can lease a vehicle through the business using salary sacrifice schemes. The monthly amount may simply cover the cost of the car, or it could encompass the whole package, including tax, insurance, services and maintenance costs, and even breakdown cover. The business never owns the vehicle. It has become a popular way to get an electric vehicle, and it is outlined more on LV ElectriX and their post about how salary sacrifice works.
Pensions are another example of salary sacrifice schemes, an employer must contribute a minimum of 3%, but most businesses tend to match employee contributions. To increase contributions, employers could choose to offer the pension as a salary sacrifice scheme. There is also a cap on how much a person can contribute to their pension savings annually. Finally, childcare vouchers are another option, although this scheme is not always the most accessible for both employers and employees.
Salary Sacrifice, Tax and NI Contributions
Salary sacrifice schemes, as mentioned above, are deducted from the salary before it is taxed, meaning that you are not taxed on your salary sacrifice, and your taxable salary is also reduced. This means that employees that have opted into salary sacrifice schemes do tend to pay less tax which can save them money in the long run. For employers, their savings tend to relate to national insurance rates. Employers can save on funds processed through salary sacrifice schemes. As an employer, all of these things need to be reported on their tax forms processed by HMRC.
The Advantages & Disadvantages of Salary Sacrifice Schemes
As outlined above, arguably, the biggest advantage for both employers and employees is the reduced tax rates and exemptions. However, this is, of course, not the only benefit. Through these schemes, employees can gain access to goods or services that they otherwise perhaps wouldn’t be able to avoid because it allows them to spread the costs. In terms of advantages for employers, offering salary sacrifice schemes can help to improve the business’s rates of employee retention and help you to attract top talent.
Of course, there are a few disadvantages to be aware of too. The biggest for employees is that it reduces their take-home salary, and this could have an effect on their credit or other big purchases and even mortgage applications. Statutory payments will also be affected by salary sacrifice schemes. Employees may also be expected to pay benefit-in-kind taxes on their salary sacrifice payments, although this usually only applies to cars. From an employer’s point of view, issues and complications could arise if an employee chooses to leave the business during a salary sacrifice scheme. They could be left holding the bag.
Salary sacrifices do tend to make sense for both employees and employers; they really are a win-win. There are a number of benefits for both employers and employees to consider, and because the schemes are all voluntary, it is the choice of the employees to get involved. Employers do not have to offer every scheme; it is up to you to think about your employees and which schemes would make the most sense for them and choose the ones that are likely to have the highest uptake.