With the upcoming increase in employer National Insurance contributions, many businesses are exploring ways to manage costs while continuing to support their workforce effectively. One potential solution that’s gaining attention is salary sacrifice. However, can this help with employer national insurance increases?
In this blog post, we’ll take a closer look at this type of financial scheme and potential benefits and drawbacks. We’ll explore the various types of schemes available, and whether businesses are required to offer this to all employees. By examining the finer details, you’ll gain a clearer understanding of whether salary exchange could be a viable strategy for your organisation.
What is Salary Sacrifice?
Salary sacrifice is an arrangement where an employee agrees to give up part of their gross salary in exchange for a non-cash benefit provided by their employer. This has been around for over 40 years. However, the key difference today is that the Government has introduced legislation to remove tax advantages for most employee benefits, making this option generally appealing only for specific benefits.
Types of Salary Exchange Options
There are a few options to consider. This includes:
- Cycle to work scheme
- Electric cars
- Purchase of additional annual leave
- Pension Salary Sacrifice
As part of the car and bike salary exchange offerings, the employee agrees to monthly salary deductions until the arrangement ends. After this, they can either buy the Car/bike at a small percentage of its value or return it, depending on the scheme provider’s flexibility. Salary sacrifice car schemes no longer offer the same National Insurance advantages, requiring employees to pay income tax on the car’s value or the sacrificed money. It’s also important to note that this is limited to electric and low-emission vehicles.
What Is Pension Scheme Salary Sacrifice and How Does It Work?
You can offer this in your workplace pension scheme by reducing an employee’s gross salary and contributing the difference, along with your own contributions, directly into their pension pot. Employers also save on National Insurance through salary sacrifice, and many reinvest these savings into employees’ pensions, further boosting retirement funds. This scheme is ideal for those looking to maximise their pension pot while taking advantage of available tax benefits. These types of arrangements are easy to set up and must comply with HMRC guidelines.
Why Choose a Salary Sacrifice Scheme?
Salary sacrifice schemes provide a range of benefits for both employees and employers. Here’s why they are worth considering:
Benefits for Employees:
- Tax and National Insurance savings – Reduces gross salary, lowering tax and NI contributions.
- Cost-effective access to benefits – Easier to afford items like pension contributions, electric cars, or cycle-to-work schemes.
- Long-term financial planning – Boosts pension savings without a significant impact on take-home pay.
- Environmental advantages – Encourages sustainable choices, such as using electric vehicles or cycling.
- Cash free benefit – Employers can provide employees with appealing benefits without the additional costs.
Benefits for Employers:
- National Insurance savings – Employers pay less in NI, freeing up funds for other investments.
- Improved employee satisfaction – Offering valuable benefits can enhance recruitment and retention.
- Support for sustainability goals – Promotes environmentally friendly options like green transport.
- Tax-efficient benefit provision – Helps maximise the value of employee benefits with minimal cost.
Salary sacrifice schemes are a win-win solution, helping employees save money while enabling employers to offer attractive, tax-efficient benefits.
What Are the Potential Risks?
While these schemes offer significant benefits, there are some potential risks and considerations to be aware of:
- Reduced Pay Affecting Entitlements – Lowering gross salary may impact statutory entitlements such as maternity pay, sick pay, or redundancy payments, as these are often calculated based on gross earnings.
- Impact on Borrowing – A reduced salary may affect an employee’s ability to secure loans or mortgages, as lenders assess affordability based on gross income.
- Minimum Wage Compliance – Employers must ensure salary sacrifice arrangements do not reduce an employee’s pay below the National Minimum Wage.
- Employer Costs and Administration – Implementing and managing these schemes may involve additional administrative work and setup costs for employers.
- Tax and Legislative Changes – Future government changes to tax laws or salary sacrifice rules could alter the financial advantages of these schemes.
Understanding these risks is important for both employees and employers to make informed decisions about participating in or offering a salary exchange scheme. Proper planning and guidance can help mitigate these risks while maximising the benefits.
Do you Have to Offer this to all employees?
Yes, you must offer salary sacrifice benefits to all employees. However, this doesn’t apply to any employee who is on minimum wage or a salary that would be lower than NMW after the benefit was implemented. You would have to offer staff a similar benefit that wouldn’t bring their pay below NMW.
If you decide to not offer all qualifying employees the scheme can lead to an expensive employment tribunal. It’s also important not to auto-enrol any staff. Always make sure they know it’s their choice.
How to Set Up a Salary Sacrifice Scheme
Setting up a salary sacrifice scheme involves several steps to ensure it complies with legal requirements and meets the needs of both the employer and employees. Here’s how to do it:
- Identify the Benefits to Offer
Decide which benefits you want to include in the scheme, such as pensions, electric vehicles, or cycle-to-work schemes. Ensure they align with your business goals and employee preferences. - Ensure Compliance
Verify that the scheme complies with HMRC rules, including National Minimum Wage regulations, tax implications, and eligibility criteria for the chosen benefits. - Communicate with Employees
Explain the scheme to your employees, highlighting the benefits, how it works, and any potential impacts, such as changes to statutory entitlements or borrowing capacity. - Monitor and Review
Regularly review the scheme to ensure it remains compliant, cost-effective, and beneficial for your employees. Update the scheme as needed to reflect any legal or organisational changes.
Implementing a salary sacrifice scheme can be straightforward with proper planning and clear communication, helping both employers and employees take advantage of its benefits.
How The HR Booth Can Help
At The HR Booth, we understand that setting up and managing salary sacrifice schemes can be a complex process. Our team of HR experts is here to guide you every step of the way, ensuring you maximise the benefits for both your business and your employees. Here’s how we can help:
- Tailored Advice: We’ll work with you to understand your business needs and recommend the most suitable options, whether it’s for pensions, electric cars, or other benefits.
- Compliance Support: Our team ensures your scheme is fully compliant with HMRC regulations and employment law, including National Minimum Wage rules and tax requirements.
- Policy Development: We can help you draft clear policies and documentation, including updates to employment contracts, so your scheme is transparent and legally sound.
- Employee Communication: We’ll assist in educating your employees about the scheme, outlining the benefits, how it works, and addressing any concerns to ensure smooth implementation.
- Ongoing Support: Once the scheme is in place, we provide ongoing advice and updates to keep your business compliant with any legislative changes and to optimise the scheme’s effectiveness.
With The HR Booth by your side, you can confidently introduce and manage salary sacrifice schemes that boost employee satisfaction and align with your business objectives. Get in touch with us today to find out how we can support you.
