What Is Salary Sacrifice & Why Can It Benefit Your Business As Well As Your Team?

By Rodney Laws | Business

Jun 08

Sacrificing salary in return for alternative incentives could create the complete package, helping your team feel valued and your business become more sustainable. 

While incentives should not replace or undermine the value of a fair and competitive wage, many professionals are warming to the prospect of salary sacrifice — an arrangement between your business and its employees that sacrifices additional pay, typically in return for a non-cash benefit of similar value. 

Wondering how such a scheme can benefit your business and its employees? Before looking at customer incentives, first turn your attention to your employees. In this article, we explore what it means to accept salary sacrifice and how it affects your operations. 

What is salary sacrifice and how does it work? 

Salary sacrifice is an agreement between employer and employee to exchange part of your salary in return for a range of alternative incentives — this can consist of anything from a flash company car to additional contributions to your pension pot.

The prospect of sacrificing salary in return for other rewards is appealing to some for its ability to build a more rounded package in compromise. But it’s not for everyone. At the crux of it all, your employees will earn less money, which is something that has to be discussed. 

Asking employees to sacrifice their salary is a rocky road for many businesses. After all, how much you get paid could be the difference between buying and renting your home — or simply supporting your family and paying the bills. 

Done right, however, salary sacrifice is an effective way to give your employees more control and earn tax breaks on incentives they want their salary to go towards. 

Pros and cons of salary sacrifice

As an employer, you can set up a salary sacrifice arrangement by changing the terms on your employees’ contract, but only if they agree to this change — so what makes the deal beneficial for both employer and employee? 

<img draggable= Tax breaks: the salary you forgo is not subject to tax or NI contributions

<img draggable= Greater flexibility: benefits can be purchased without paying tax on your salary

<img draggable= Savings: your business pays less in terms of overall salary, which can be reinvested

Salary sacrifice is a sensible way of saving money and helping employees receive benefits they would otherwise pay for using their base salary. The caveat, however, is the arrangement isn’t suitable for everyone — not least because employers cannot offer it in place of the national minimum wage.

Moreover, there are many areas for both employer and employee to consider before pressing ahead with salary sacrifice arrangements: 

<img draggable= Your team earn less: this affects people’s livelihoods or even mortgage applications 

<img draggable= State entitlements: state schemes like pensions and support allowances may be hit

<img draggable= Life cover: existing incentives through the business like life cover may be reduced 

Salary sacrifice is a two-sided coin that on one end incentivises efficiency and makes benefits more affordable to employees — and on the other, means your team earns less money, which could impact many areas of their life. 

Incentives and salary sacrifice ideas

Not sure what to include in your salary sacrifice scheme? Below are a few simple (and effective) incentives both you and your team can benefit from: 

Cycle-to-work scheme

Cycle-to-work schemes prove to be a popular salary sacrifice incentive because they ease the cost and burden of travel, helping employees save money on high-end cycle purchases. 

As an employer you buy the bike and lease it to your employee — this lets you reclaim VAT, which you can invest back into the business or pass the savings onto your team. 

Additional employee pension contributions

Providing additional pension contributions instead of adding to an employee’s salary is a tax-efficient way of helping them save for retirement — and retain their service for many years. It is a low cost, flexible arrangement where your business pays an additional percentage, equal to the salary the employee has sacrificed. 

Gym membership

Your business can offer employees gym memberships at corporate rates through salary sacrifice. Savings for your employees vary between memberships, but it averages at 10-25% off annual fees. With this you can save on Class 1 National Insurance and support your team’s physical and mental wellbeing. 

Vehicle leasing programme

Salary sacrifice car schemes are a surprisingly low-cost incentive to introduce into your business. You can mediate upfront costs by purchasing low-emission or electric cars, which come with government grants and favourable tax breaks. Plus, you can control running costs using fuel cards — a payment method for fuel that comes with fixed discounted rates. 

Childcare vouchers

Childcare vouchers allow parents to save money by allowing them to pay for childcare from their pre-tax salary. This scheme works through salary sacrifice where your employer gives you tax-free vouchers to use for childcare support. While you can still choose your own childcare providers, there are limits to how much you can claim. 

Summary: salary sacrifice benefits your business and team

Salary sacrifice is appealing to your team because it makes for a more rounded and balanced employment package — and it benefits the business by saving money and retaining employees

At the crux of it all, however, salary sacrifice isn’t suitable for every employee, nor any old business. Understand how such a scheme would look in your business and identify how it would fulfil your team’s needs, wants, and desires.