As a business leader how do you create more value and spend less?
The answer: salary sacrifice scheme. Yes, it’s an employee benefit; but it’s also a powerful business strategy that top UK companies use for growth.
If you’re paying more in tax than you need to, your employees are taking home less than they could, then a salary sacrifice scheme benefits everyone.
We’ll explain this with an example. But before that, let’s go over the various salary sacrifice schemes.
Types of Salary Sacrifice Schemes
What is a salary sacrifice scheme?
It’s an agreement between the employer and the employees. In simple terms, employees give up part of their gross salary in exchange for non-cash benefits, reducing both parties’ tax and National Insurance (NI) contributions.
Some of the popular salary sacrifice schemes include:
1. Pension Contributions
What is it: Instead of pension contributions being deducted from net pay, employees exchange part of their gross salary for increased employer pension contributions.
Key characteristics:
- Most popular and tax-efficient option
- No employer or employee NI contributions on sacrificed amount
- Reduced income tax for employees
2. Electric Vehicle Scheme
What is it: Employees can lease a brand new electric vehicle through a salary sacrifice arrangement, with payments taken from their gross salary.
Key characteristics:
- Zero benefit-in-kind tax rate for pure electric vehicles
- NI savings for both parties
- Environmental benefits aligning with ESG goals
3. Cycle to Work
What is it: A government-supported initiative for employees to get bicycles and cycling equipment through their employer. The cost is deducted from gross salary over an agreed period (typically 12-36 months).
Key characteristics:
- Equipment up to £1,000 (or unlimited with FCA approval)
- Promotes health and sustainability
- Full NI and tax relief available
4. Workplace Nursery
What is it: Employees can exchange part of their gross salary for workplace nursery benefits. This unique scheme can offer high tax savings which can be beneficial for working parents.
Key characteristics:
- Complete income tax and NI relief
- No cap on benefit amount
- Average saving: £6,500 per annum
5. Technology and Equipment
What is it: Employees can own the latest tech through their employer, with payments deducted from gross salary. Plus they can get tax benefits as long as the gadget(s) is used for work purposes.
Key characteristics:
- Computers, phones, tablets
- Must have significant business use
- Fixed-term agreements available
Salary Sacrifice Scheme: Tax Advantage Explained with Example
Let’s examine a practical example using pension salary sacrifice, the most commonly implemented scheme.
| Important Disclaimer: The following calculations are only for illustration purposes. Tax rates, thresholds, and NI contributions are subject to change. Always consult current HMRC guidelines and a financial wellbeing expert for calculations specific to your circumstances. |
Comparative Analysis Table (Based on £50,000 Annual Salary with £5,000 Sacrifice)
| EMPLOYER COSTS | |||
| Component | Pre Salary Sacrifice | Post Salary Sacrifice | Annual Benefit |
| Base Salary | £50,000 | £45,000 | £5,000 reduction |
| Employer NI (13.8%)* | £5,165.34 | £4,475.34 | £690 saving |
| Pension Contribution | £5,000 | £5,000 | No change |
| Total Employer Cost | £60,165.34 | £54,475.34 | £5,690 saving |
| EMPLOYEE IMPACT | |||
| Component | Pre Salary Sacrifice | Post Salary Sacrifice | Annual Benefit |
| Gross Salary | £50,000 | £45,000 | £5,000 reduction |
| Income Tax** | £7,486 | £6,486 | £1,000 saving |
| Employee NI (12%)*** | £4,491.60 | £3,891.60 | £600 saving |
| Take-Home Pay | £38,022.40 | £34,622.40 | £3,400 reduction |
| Pension Contribution | £5,000 | £5,000 | No change |
| Net Cost of Pension | £3,000 | £1,400 | £1,600 saving |
*Employer NI calculated as 13.8% on earnings above £12,570
**Income Tax calculated at 20% on earnings between £12,570 – £50,270
***Employee NI calculated at 12% on earnings between £12,570 – £50,270
Here’s how we arrived at the above (tabulated) figures:
Before Salary Sacrifice (£50,000):
- Taxable income: £50,000 – £12,570 (Personal Allowance) = £37,430
- Income Tax: £37,430 × 20% = £7,486
- Employee NI: £37,430 × 12% = £4,491.60
- Employer NI: £37,430 × 13.8% = £5,165.34
After £5,000 Salary Sacrifice (£45,000):
- Taxable income: £45,000 – £12,570 = £32,430
- Income Tax: £32,430 × 20% = £6,486
- Employee NI: £32,430 × 12% = £3,891.60
- Employer NI: £32,430 × 13.8% = £4,475.34
Key Benefits Summary
- For Employers
- Annual NI savings of £690 per employee (based on £5,000 sacrifice)
- Reduced pension administration costs
- Lower overall payroll costs
- Enhanced benefits package at no additional cost
- Improved employee retention rate
Suggested: Accelerate your savings with tax efficient schemes and learn how to implement a sacrifice scheme with this free guide.
- For Employees
- Annual tax savings of £1,000
- NI contribution reduction of £600
- Same pension contribution at lower net cost
- Lower taxable income
- Greater take-home pay relative to pension contribution
Also read: Top 8 Tips to Save Money for Financial Stability
Salary Sacrifice Success Stories: Are You Missing Out?
The tax advantages we’ve discussed translate into real benefits, as demonstrated by two tech companies that implemented salary sacrifice through Maji.
A London-based tech company with 49 employees achieved remarkable results:
- £22,395 in company savings since December 2021
- £500 monthly collective increase in employee take-home pay
- 20% of employees increased pension contributions after financial coaching
- Enhanced employee financial wellbeing through expert-led workshops
Similarly, a 90-employee software company saw impressive outcomes:
- £59,202 in company savings
- 90% employee participation rate
- £14,231 collective employee savings through NI reductions
- 29% of employees increased contributions post-coaching
- 46% engagement with personal financial coaching plans
These companies succeeded by following a structured approach:
- Capitalizing on Maji’s key features, including deep data insights and automation
- Providing comprehensive financial education through expert coaching
- Maintaining quarterly scheme reviews
However, success requires careful navigation. Our blog on avoiding salary sacrifice pitfalls highlights crucial considerations:
- Proper scheme documentation to ensure HMRC compliance
- Clear communication strategies that drive engagement
- Regular reviews to maintain tax efficiency
- Protection of employee benefits and statutory payments
- Strategic timing of implementation
Also read: Smart Budgeting Tips for Young Adults: A Pathway to Financial Freedom
From Good Benefits, to Great Growth
Implementing a salary sacrifice scheme provides savings for both parties. And if that’s not enough, it also adds value to the benefits package.
As Warren Buffett says, “Price is what you pay, value is what you get.” Your decision to implement salary sacrifice today will create lasting benefits for your business and your team.
