Businesses and employees are both constantly looking for ways to reward team members while keeping costs down. One way to do this that’s often overlooked is salary sacrifice.

Salary sacrifice involves an agreement between an employee and employer to reduce the employee’s salary in exchange for certain non-cash benefits. It may seem counterintuitive, but salary sacrifice can be a useful tool for saving tax for both parties.

Benefits for the business

1 For a business, salary sacrifice schemes can reduce National Insurance contributions. 

As an example, offering non-cash benefits such as pension contributions or cycle-to-work schemes in exchange for a salary reduction reduces employers’ National Insurance contributions. The employee wins as they receive the benefit.

2 Offering attractive benefits through salary sacrifice can enhance feelings of job satisfaction for employees and improve staff retention.

Benefits for the employee

From an employee perspective, salary sacrifice offers a number of tax-saving opportunities. By opting to receive non-cash benefits instead of additional salary, employees can reduce their taxable income and so reduce the tax they pay.

Contributions to a workplace pension are deducted from the employee’s gross salary before tax is applied. If an employee sacrifices some of their salary to make additional pension contributions, the amount of tax they pay will reduce.

Salary sacrifice arrangements can also enable employees to access valuable benefits that they might not otherwise be able to afford.

Are there any downsides?

While salary sacrifice can be a good tax saving strategy, it’s not suitable for every situation.

Many salary sacrifice schemes are caught by tax regulations or have set requirements, so it pays to check these and make sure a scheme will be suitable for your business. Employees too need to carefully assess their individual financial circumstances and priorities before entering into salary sacrifice agreements.

Reducing their salary may cause issues around affordability for finance applications for example.

In conclusion…

Salary sacrifice can be a win-win for both businesses and employees. 

With careful planning and implementation, salary sacrifice can be a great tool for all parties.

If you’d like to discuss some of the options for salary sacrifice, please get in touch; we can help you calculate their impact and ensure they abide by the requirements.