Don’t be put off by the name. Although salary sacrifice does technically require a ‘sacrifice’, these schemes are very much designed with benefits in mind.

In this article, we provide a brief overview of the concept of salary sacrifice before exploring how it works in practice and why it’s becoming an increasingly powerful tool for employers battling to attract and retain top talent.

In simplified terms, salary sacrifice is the name given to employer-led schemes where an employee agrees to ‘sacrifice’ a specific amount of their salary in return for a non-cash benefit. The concept is also sometimes referred to as salary exchange, which more accurately reflects the fact that the sacrifice by the employee is only one part of the equation, and that it is balanced by a benefit.

Optimising pension contributions

Pension contributions are a common example of a benefit that can be delivered via salary sacrifice. Here, rather than an employee paying a personal pension contribution into their pension from post-tax earnings, they will typically agree to a reduction in their wage that is equivalent to the contribution level. Their employer then pays this amount into the employee’s pension along with the regular employer contribution.

As a result, the overall level of the pension contribution is maintained. However, by agreeing to the salary reduction, the employee will also face a reduction in their income tax and National Insurance burden, meaning take-home pay is higher.

In addition, the National Insurance requirement for employers will be reduced, with some employers also choosing to pass this saving on to the employee as a further boost to their pension savings.

A route into EV ownership

Salary sacrifice can be applied to more than just pension contributions, however. The Cycle to Work scheme has long given employees a tax-efficient route into new bike ownership and, more recently, salary sacrifice schemes have been used to help employees access the world of electric vehicles (EVs), which might have otherwise been financially out of reach.

Research suggests there is currently a supply-demand imbalance for this particular benefit, with almost three-quarters of workers (74%) keen to be offered the chance to drive an EV via salary sacrifice and less than a fifth (18%) of businesses providing this option.

With EVs, just as with pension contributions, the employee will agree to a reduction in their pre-tax salary which is equivalent to the benefit – which in this case is the cost of the vehicle lease. However, the employee will also be required to pay benefit-in-kind (BiK) tax on the car since they will have access to it in their personal time as well as for business use.

The exact amount you pay in BiK tax will depend on a number of factors, including the environmental impact of the vehicle, its value and your personal income tax rate. For the 2024/25 tax year, the company car tax rate for an EV (as set by HMRC) stands at 2% of the vehicle’s taxable list price – known as the P11D value. This compares highly favourably compared with vehicles that submit the highest levels of CO₂, which can attract a company car tax rate as high as 37%.

Factors to consider

Whether supporting the lease of an EV or pension contributions, salary sacrifice can deliver clear financial advantages. However, there are some important considerations that should be taken into account.

For example, a fundamental aspect of salary sacrifice is that the employee is agreeing to a reduction in their salary, and this can have potential implications when it comes to borrowing, particularly where loans are based on salary multiples – as is typically the case for mortgages.

A lower salary might also result in a comparatively lower level of life cover if this is calculated on the basis of your salary after the ‘sacrifice’ has been accounted for.

When it comes to pensions, it is also worth considering the fact that salary sacrifice schemes place the emphasis on employer (rather than employee) contributions, which generally can’t be refunded. This is not necessarily the case for personal contributions, which can typically be refunded if you leave within 30 days of joining a defined contribution (DC) scheme or within two years if it’s a defined benefit pension.

As these points highlight, it’s important for employees and employers alike to understand exactly what is involved before entering into a salary sacrifice agreement. In the right circumstances, however, it is a proposition that can work for both sides.

For an employee, it can enhance earning and saving potential or open the door to tax-efficient, low-carbon motoring. For an employer, it can provide direct savings while also enhancing perception among existing and potential employees. In this context, what initially might sound like a one-sided sacrifice can actually be seen as a high-value exchange with mutual benefits.

The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Vintage Corporate or any of its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.