Salary Sacrifice Schemes

Salary sacrifice schemes can be highly beneficial for both employer and employee. This voluntary arrangement works by the employee sacrificing part of their cash remuneration; on which PAYE tax and NICs are due, and exchanging this for non-cash related benefits; which are partially and often wholly exempt from tax and NICs.

The end result of this is that the employee has access to a number of benefits at effectively a reduced overall cost, and the employer benefits by not having to pay employers NI. There are a number of cashless benefits that make up salary sacrifice schemes and the main ones include:

Sacrificing salary as part of a pension contribution can; 

  • Reduce employer’s NI cost
  • Increase the member’s take-home pay
  • Increase contributions to the member’s pension scheme

 How does it work?

If a member currently pays a contribution of 5%, he/she takes a 5% salary reduction and stops paying the personal contribution. The 5% salary reduction is paid as an employer contribution to the pension scheme.

The member’s take-home pay increases by the saving in employee NIC on the lower salary (12% on earnings up to £41,444, 2% thereafter). 

 

Without Salary Sacrifice £

With Salary Sacrifice £

Salary

25,000

23,750

Personal Allowance

9,440

9,440

Taxable income

15,560

14,310

Tax payable

3,112

2,862

NI

2,070

1,920

Net salary (gross earnings less tax and NI)

19,818

18,968

Deduct employee pension contribution (net)

1,000

0

Net disposable Income

18,818

18,968

Every working parent is entitled to use between £110 and £243 from their gross salary. The average saving as an employer for every employee that joins the scheme is £300 per year in NICa. The vouchers themselves can be used for children aged 0-15 years (or 16 years if the child has a disability), to pay towards registered:

  • Nurseries
  • Playgroups and pre-school
  • Childminders
  • After-school and breakfast clubs
  • Holiday play schemes
  • Nannies

 Savings for the employer: 

Number of your employees
using vouchers

1

5

25

50

100

200

Estimated Employer NIC Annual Savings

£331

£1,656

£8,280

£16,560

£33,120

£66,240

* Illustrated employers NIC savings based on an average voucher value of £200 per employee per month and employers NIC at 13.8% (contracted in NIC rate)

 Savings for the employee:

In order to encourage healthier lifestyles the UK Government introduced the Cycle to Work Scheme. In addition to the health and environmental benefits, it also provides financial benefits to both the employer and employees. 

Savings vary depending on the rate of tax and NI the employee pays. For example, a lower rate tax payer (paying 20% PAYE tax and 12% NIC) would save approximately 32% off the normal bike price. Likewise, if the employee is paying a higher rate of tax (paying 40% PAYE tax and 2% NI) would save approximately 42% off the normal bike price. The employer will also make a saving on the employers NIC on the value of the salary sacrifice.

The salary sacrifice period is at the discretion of the employer and is usually between 12 and 18 months, but can be any period of time up to six years. The length of the period should not affect the overall cost to the employee. For example a bike and related safety accessories costing £600 should result in a £50 monthly salary sacrifice over 12 months or £33.33 per month over 18 months.

If you would like to discuss any of the schemes outlined here, or any others that you are considering implementing, please contact a member of the us team.