How to Save Money with Salary Sacrifice

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Looking for a way to cut your costs? Why not save money with salary sacrifice.

There’s an HMRC-approved scheme which lets your business save money whilst also helping your employees too.

This is the salary sacrifice scheme, also known as a salary exchange scheme. It allows employees to give up part of their salary in return for extra non-cash benefits from their employer. As the employer, you save money because you do not pay National Insurance on the money that’s no longer paid as salary.

Watch the short video below to see how salary sacrifice could save your business money when used with a pension scheme.

How Salary Sacrifice With a Pension Scheme Saves You Money

One of the common ways to run a salary sacrifice scheme is for employees to exchange salary for pension contributions.

This means that your staff can opt to swap part of their salary for pension contributions, of the same amount, from the company. So they’ll have a lower salary but the same overall pension contributions (employer, employee and HMRC).

As a result, your business will no longer have to pay Employer’s National Insurance Contributions on the salary your staff have given up.

The Benefit for Your Employees from Salary Sacrifice

Whilst salary sacrifice helps your business to save money it’s also a benefit for your staff too.

As well as receiving pension contributions in return for a lower salary, your employees will also pay less tax and National Insurance because of the salary they’ve given up. So it’s a tax-efficient way for people to save for their pension and potentially increase their net pay.

What’s more, the business’ savings on National Insurance Contributions can be retained by the company or passed onto the employee as a further benefit.

How Much You Can Save with Salary Sacrifice

To see how much your business can save, take a look at this example:

For an employee who earns £30,000, with the auto-enrolment minimum contribution for their pension, you pay 3% of their qualifying earnings within the employees auto-enrolment earnings threshold, and they pay 5%.

If you introduce a salary sacrifice scheme and the employee opts into this, your business will save approximately £164 per annum.

The more employees you have who take part in the scheme, the greater the savings for the company. So if 50 employees, each earning £30,000, take part in salary sacrifice, this becomes an annual saving for the business of approximately £8,200.

Other Possible Ways to Use Salary Sacrifice

Salary sacrifice can be used in a number of ways. You’re not limited to offering extra pension contributions.

You can also use a salary sacrifice scheme to offer your staff other types of benefits. These include:

  • Childcare vouchers
  • Company car
  • Work-related training

The principles of the scheme are the same, what changes is the benefit you offer to your employees. You decide which benefits your employees can choose from in return for a lower salary. The business makes savings through lower National Insurance Contributions paid on salaries.

3 Key Things to Remember About Salary Sacrifice

It’s important to remember some key points about the salary sacrifice scheme which could impact your business and your staff.

Firstly, your employees will need to weigh up the benefits they’ll receive from salary sacrifice. Extra pensions contributions vs the lower salary.

That’s because a lower salary may affect the amount your employees can borrow for a mortgage. A lower salary could also impact contribution-based benefits for your employees. For example the State Pension or Job Seeker Allowance.

Secondly, the scheme needs to meet the HMRC rules.

The company must ensure that the salary sacrifice scheme does not bring an employee’s earnings below the National Minimum Wage levels. Also, your employee’s contract must change when they opt in or opt out of a salary sacrifice scheme.

Finally, if your company offers life cover, you’ll have to choose how to calculate this. Whether to base this on the employee’s original salary or their lower salary following salary sacrifice. This should be part of the information you share with people about the salary sacrifice scheme.

What HMRC Says About Salary Sacrifice

HMRC give a clear statement about salary sacrifice in Employment Income Manual (EIM42752):

“Salary sacrifice is commonly used by employers or employees to take advantage of the exemption from tax or NIC or both of certain benefits. It is important to recognise that employers and employees have the right to arrange the terms and conditions of their employment and to enjoy the statutory tax and NIC treatment that applies to each element in the remuneration package. Arrangements, which are designed to make use of these exemptions, should not be regarded as avoidance.”

In addition, salary sacrifice relates to employment law and not tax law, so it would be inappropriate for HMRC to get involved in the contract between an employer and their employee.

Save Money for Your Business and Your Employees

As an employer, you have to provide a pension for your staff and make contributions. However, a salary sacrifice scheme lets you do this in a way that saves your business money and benefits your employees too.

So you pay lower National Insurance Contributions and your staff can save for their pension in a tax-efficient way. Whilst potentially taking home more net pay.

To find out more about how your business can save money with a salary sacrifice pension scheme, please call our team on 0345 224 3175 or email and we’ll get right back to you.

Please note: tax reliefs referred to, are those currently applying, and are liable to change.

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