Salary sacrifice is one of the most easily accessible ways for employers to enhance employees’ financial wellbeing and save the company money in the process.

Also known as Salary Exchange, this is a process whereby employees sign a contract with employers to give up part of their monthly salary in exchange for non-cash benefits.

The Workplace Pension is one of the most common examples, where salary sacrifice helps individuals to boost their pension savings. However, it is a versatile concept that can be applied to a wide range of benefits to suit your team, such as tax-free childcare, annual leave, annual travelcards, health screening checks and work-related training.

Electric cars are another popular benefit accessible using salary sacrifice. After implementing their salary sacrifice car benefit scheme last year, EDF recently announced that its 500th employee has used the scheme to switch to an electric car. With sustainability at the forefront of global conversation, this is an increasingly popular way for businesses to both incentivise their teams to make environmentally friendly choices and enhance their reputation as a conscious employer.

Employers must choose to opt in to a scheme and salary sacrifice amounts depend on the benefit itself and the terms that the employer has chosen. Salary sacrifice is an efficient route for employers to take should they wish to purchase flexible benefits, where employees can buy additional or different benefits from the standard package to suit their individual requirements. Popular examples include additional life insurance or extending private healthcare to cover their spouse.

The Tax Situation

Salary sacrifice contributions are non-tax-deductible but the payments on some benefits may reduce your taxable income and your overall salary, such as pensions and employer-provided childcare. By giving up their salary “in advance”, employees have lower tax and National Insurance payments overall for a positive knock-on effect on pension savings. However, some benefits will still be taxable.

Salary Sacrifice and the Workplace Pension

Salary sacrifice is a great way to make your workplace pension scheme more cost-effective. As employers pay less tax and National Insurance due to the reduced employee salary, these savings reduce the overall cost of pension contributions and can also be used to cut overall workplace pension scheme admin costs.

Employees can choose to redirect these savings towards their pension for a regular boost to their pot, while higher rate taxpayers receive full tax relief of their contributions without any additional paperwork required.

With both employers and employees making savings, this is a strong framework from which to boost employee engagement with both overall benefits and the importance of pension savings. It’s important to note that salary sacrifice is unlikely to impact the individual’s state pension entitlement unless the reduced salary falls below the threshold for National Insurance contributions.

Opportunities for Employers

Despite the clear return on investment, research shows that just half of British businesses are using the salary sacrifice benefits available for workplace pensions. This translates to more than 15 million people missing out on the opportunity to contribute an average additional £204 into their pension every year.

The research showed that many businesses don’t recognise the perceived benefits to employees while others simply think it’s too much hassle to implement. But employers need to understand just how importance salary sacrifice can be for recruitment and retention.

As Keith Humphrey, CEO of Workplace Pensions Direct, explained to Employee Benefits: “with workers now expected to contribute 50% more to achieve the same predicted payout compared to a decade ago, the implications for health, social care and quality of life during retirement will be indescribable.” 

The message is clear. Employers that help their teams to prioritise healthy pension savings will stand above their competitors in the recruitment market. This is especially crucial during these uncertain times when applicants are looking for a little something extra from the company that they choose to work for, especially when it comes to financial security and wellbeing.

Setting up Salary Sacrifice

There are some essential things to note when it comes to salary sacrifice, the workplace pension and overall benefits. As just one example, the employee’s reduced gross salary may impact other aspects of their earnings such as their bonus and pay increases.

It’s also important that employers gain a full understanding of the concept in order to communicate effectively with their team. A lower salary can affect entitlements like maternity/paternity pay or mortgage applications based on individual income and some state allowances but it may also mean the employee is eligible for additional tax credits.

Our specialists Employee Benefits Consultants will help you to navigate the finer details of salary sacrifice and find the right solution for your company. Adopting a whole of market approach, we will identify those products with the best terms and conditions to meet your needs and ensure the most effective return on investment.