What is salary sacrifice?

For both employees and employers alike, a salary sacrifice option can help save on tax. Under the salary sacrifice scheme, employees receive benefits as non-cash rather than cash. To collect the right information from your company’s employees, HR teams might want to gather this information via a salary sacrifice form. It’s also common practice to allow employees to opt out of salary sacrifice in general. In this guide, we’ll look at what salary sacrifice is, how to calculate it, as well as provide a useful example form.

Salary sacrifice is an agreement between a company and its employees to reduce their cash entitlement for non-cash benefits.  Salary sacrifice non-cash benefits can include childcare vouchers, cycle-to-work schemes, laptops, phones and other electronic equipment.

This scheme is backed by the UK government. As they replace cash benefits, they’ll need to be reported to HMRC at the end of the tax year as end-of-year expenses.

However, employees have to agree to a salary sacrifice first. This means you’ll need to get confirmation from them that they’re happy to opt in. Once they’ve opted in, you’ll need to update their employment contract. An employee has to agree to these contract changes as well, the same goes for if they want to opt out of salary sacrifice. They’ll need their employment contract updated to reflect this too. 

Whether an employee chooses to opt in or out might depend on their personal financial circumstances. Let’s look at an example; imagine a member of staff wants childcare vouchers for a few years while they’re raising children. That’s the only benefit they’re looking for. Once their children have grown up, they’re no longer interested in the vouchers and so opt out of the salary sacrifice.

In this next section, we’ll look at some of the top favoured salary sacrifice benefits that employees can enjoy. This also includes ways you could go about providing them.

There are lots of different car benefit solutions you can provide via salary sacrifice. One of the best benefits of this is that employees usually don’t have to pay a deposit for a car. When an employee receives a company car, you can include other extras like road tax, car insurance, maintenance and breakdown cover.

If your organisation is environmentally conscious, it can be worth looking into providing electric vehicles or low emission vehicles instead. Low emission vehicles are also currently exempt from tax rules, but this may be subject to change.

While car benefit solutions may not be as popular as other schemes at the moment, it could be a great way for employees to try out more eco-friendly alternatives to petrol cars. Another similar option includes the employee car ownership (ECO) scheme, which gives employees the option to select a car of their choice rather than a company car. This gives them a wider variety of choices which could include greener solutions.

You can help make bikes more affordable and accessible to employees with the help of a cycle-to-work scheme. There are many different routes you can take when introducing one so it can be a good to look into what’s most beneficial for your employees. Some options include fully paying for a bike, or just simply providing discount codes or vouchers.

While some organisations rely on cycle-to-work vouchers, others have an online shop which allows employees to select the packages that most interest them. This could include cycling clothing, bike accessories or part replacements. That way, your employees’ experience of the scheme is fully customisable and relevant to what they need. It also makes the cycle-to-work scheme more appealing to existing cyclists who are looking to upgrade their bike.

When looking to set up your cycle-to-work scheme, it can be useful to investigate apps and companies that make setting this up easier. Setting up the scheme can feel complex so removing some of the barriers to this can help employers to focus on providing what matters to their employees.

Employees can gain registered childcare with the help of childcare vouchers, this can be a good way to retain staff with young children. The UK’s government website explains that if you choose to offer childcare vouchers, you are exempt from certain tax obligations. This includes vouchers for commercial childcare, as well as workplace nurseries. However, there are some limits to this exemption – the limit is £55 per week, or £243 a month. For more information, you can visit the UK government’s webpage on expenses and benefits.

Employee non-cash benefits can also include devices like smartphones, laptops, tablets and other electronic equipment. You can provide this in the form of discount vouchers or by offering to pay fully for them. This type of benefit can help retain staff who are interested in following the latest trends in technology, or have hobbies and interests which require a laptop or smartphone.

Technology benefits can also have wellbeing benefits as well. Some employees work better when they’re able to work to music or with noise-cancelling headphones, for example. Providing a range of different options can help give employees some added flexibility when choosing their benefits.

Now that we’ve covered some of the most popular salary sacrifice options, let’s look at how salary sacrifice works. Salary sacrifice is also known as salary exchange – it means swapping some of an employee’s salary for non-cash benefits. 

Because of this, both the company and their employee have to pay less in National Insurance (NI) tax contributions. Another benefit is that an employee can pay less on their own income tax. Employees can also use salary sacrifice to pay into their pension contributions.

While non-cash perks are benefits in themselves, salary sacrifice can also provide employees with more take-home pay. Employees can also accept a salary sacrifice scheme that works around their own personal interests and professional aspirations. 

Salary sacrifice may not be legally permissible if it means an employee’s salary drops below the UK’s minimum wage. It is therefore worth keeping this in mind when calculating a possible salary sacrifice for your employees. Also, you may have to gain consent from an employee before using the calculator in order to provide salary sacrifice figures.

Want to understand more about how salary sacrifice works? Let’s explore this in a quick step-by-step guide:

One of the other benefits of salary sacrifice, is that it can help employees to escape higher tax payment bands. If they accept a salary sacrifice, they may drop a tax threshold and therefore save money.

While salary sacrifice can be a great option for employees looking to save on tax, there are other employee benefits that are relevant to consider.

Our employee benefits survey template can help you find out what matters most to your employees. You can also use this template to find out:

Another great option is our employee satisfaction survey template, which helps you find out how employees rate other perks such as recognition, career progression options, work-life balance and much more.

Below, we provide a template which helps HR teams gather salary sacrifice information from their employees. This includes whether they’ve chosen to opt-in or opt-out.

Use this guide to find out whether salary sacrifice could be a good option for both you and your employees. Salary sacrifice provides a wide variety of non-cash benefits which are usually less taxable than an employee’s income. While this might not be the best option for all your employees, some may stand to gain, particularly if it means moving them into a lower income tax band. With our salary sacrifice template, you can find out what salary sacrifice your employees are looking for. Find out what loyal employees want today with SurveyMonkey’s employee benefits feedback software.