Salary Sacrifice Scheme: An Employer’s Guide

Salary sacrifice schemes can be a smart and strategic way for employers to enhance their benefits offering, while managing costs. When implemented correctly, these arrangements can support business growth, improve employee satisfaction and ensure payroll efficiency.

In this guide, we break down:

• What a salary sacrifice scheme is.
• How it works.
• What you need to consider as an employer.

What is a salary sacrifice scheme?

A salary sacrifice scheme is an agreement between an employer and employee where the employee gives up a portion of their gross salary in return for a non-cash benefit. This benefit could include things like pension contributions, childcare vouchers, cycle-to-work schemes or electric car leases.

The key feature of salary sacrifice is that the reduction in salary happens before income tax and National Insurance (NI) are applied. This can lead to tax and NI savings for both the employee and the employer.

Examples of salary sacrifice in action

Salary sacrifice can be used for a range of benefits, depending on your company’s policy and the employee’s eligibility. Common examples include:

• Pension contributions: Boosting retirement savings through tax-efficient pension top-ups.
• Cycle to work schemes: Helping employees access bicycles and equipment for commuting.
• Electric vehicle leasing: Providing eco-friendly travel options at a reduced cost.
• Childcare vouchers: Although now closed to new applicants, some employees remain eligible under legacy schemes.

Each of these examples can support employee wellbeing while offering potential savings.

How salary sacrifice benefits employers

There are several key benefits for businesses that offer salary sacrifice, including:

• Tax and NI savings: Employers pay lower Class 1 NI contributions on the reduced salary.
• Improved employee benefits package: A cost-effective way to expand your benefits without increasing salaries.
• Recruitment and retention advantages: Salary sacrifice can make your benefits package stand out in a competitive job market.

Salary sacrifice can also show your commitment to employee financial wellbeing, which is increasingly valued by job seekers.

How salary sacrifice benefits employees

For employees, salary sacrifice can provide access to valuable perks and financial savings. Key benefits include:

• Tax and NI efficiency: Contributions made via salary sacrifice are taken from gross salary, reducing the amount of tax and NI payable.
• Greater value from pay: Employees can access higher-value benefits than they could afford with post-tax income.
• Support with long-term goals: For example, salary sacrifice pensions help employees save more for retirement with less impact on their take-home pay.

That said, it’s important for employees to understand the impact on their net income, as well as how certain salary-linked benefits (like mortgage applications) might be affected.

Salary sacrifice and pensions: what employers need to know

Pensions are one of the most popular and tax-efficient uses of salary sacrifice. But to offer this benefit, employers need to ensure they are staying compliant.

Workplace pension considerations

Salary sacrifice cannot reduce an employee’s salary below the National Minimum Wage. You must ensure any arrangement leaves the employee with enough pay to meet legal thresholds.

Compliance with pension rules

When using salary sacrifice for pension contributions, you should review your processes in line with His Majesty’s Revenue & Customs (HMRC) and The Pensions Regulator guidelines. This includes reviewing your scheme regularly and updating contracts of employment.

Communicating pension changes to employees

Clear communication is essential. Employees must understand the impact of salary sacrifice on their contributions, take-home pay and statutory entitlements. It helps to provide written information and offer a chance to ask questions before opting in.

For guidance on pension auto-enrolment, take a look at our auto enrolment guide.

Key compliance and tax considerations

Offering a salary sacrifice scheme requires close attention to compliance and payroll practices. 

Employers must ensure their schemes meet HMRC conditions. That includes making sure the benefit offered is eligible and that salary sacrifice arrangements are documented and agreed in writing.

You must also report certain benefits to HMRC and ensure they are processed correctly through payroll or through payrolling benefits in kind. 

Common pitfalls and how to avoid them

• Not updating employment contracts to reflect changes in salary
• Reducing salary below statutory minimums
• Failing to properly explain the scheme to employees

These issues can lead to non-compliance and employee dissatisfaction.

Payroll and record-keeping best practices

Accurate payroll processing is critical. Use automated systems to manage deductions, contributions and reporting. Our payroll software is designed to support compliance and streamline the process.

If you’re unsure where to start, explore our HR and payroll compliance guide.

Download your free salary sacrifice guide

Ready to unlock the benefits of salary sacrifice for your team? Our expert guide breaks down everything you need to know, from tax efficiencies to compliance must-haves. Download your free Salary Sacrifice Guide and take the next step towards a smarter, more rewarding payroll strategy.