As the Chancellor announced an increase in National Insurance (NI) rates from 13.8% to 15% on 30 October 2024, many employers are facing higher costs on the horizon. But there’s a silver lining: salary sacrifice schemes can offer significant savings opportunities for your business, helping to offset these new expenses and keep costs neutral.
If you’ve spent any time on the Maji blog, you’ll already know that a salary sacrifice pension arrangement is a great way to save money for your company and employees. But did you know there are other types of salary sacrifice schemes you can set up to gain even more benefits?
In this article, we’ll cover some of the main salary sacrifice options and how they could have a positive impact on you and your employees.
What's in this blog?
What is salary sacrifice?
Salary sacrifice, also known as salary exchange, is an arrangement in which a portion of an employee’s salary is exchanged for a benefit of equivalent value. The employee ends up with a benefit they want plus a reduced salary, which lowers their tax bill.
There is sometimes the possibility for you to save on tax costs, too, depending on the type of salary sacrifice you choose to implement. This will apply if it’s one of the schemes exempt from benefit in kind tax:
- Payments into pension schemes
- Pensions advice provided by an employer
- Workplace nurseries
- Childcare vouchers (if the scheme started before 2018)
- Bicycles/bike equipment/cycle to work
- Electric car leasing
This doesn’t mean you can’t run salary sacrifice for other benefits, but be aware there will be tax levied, so you won’t save money as an employer. There will still be savings for your employees, however. Other salary sacrifice schemes can include:
- Technology for work (laptops and phones)
- Car maintenance
How to get started
As an employer, you can research and set up these schemes individually, either on your own or working with external providers. However, working with a third party like Maji can make it much easier to set up, communicate, and manage your salary sacrifice schemes.
A third-party partner can help with:
- Researching and vetting the different options for scheme providers, so there’s less risk for you
- Reducing the time and effort required to get these set up
- Securing you better deals and exclusive offers
- Integrating these schemes into your wider wellbeing strategy
Please get in touch to discuss these options, get more detailed projections of your potential savings, and find out how we can help you offer these amazing benefits for your employees.
Different types of salary sacrifice
1. Salary sacrifice pension arrangements
Let’s first of all recap how salary sacrifice pension arrangements work.
As a workplace, you are required to offer a pension scheme and enrol any eligible employees into this. Under the ‘normal’ (otherwise known as relief at source or net pay) arrangement, you put in a contribution (e.g. the default minimum of 3% of their qualifying earnings) and they put in theirs (e.g. 5% of their qualifying earnings).
However, in a salary sacrifice arrangement, you make the full contribution (e.g. in this case 8% of qualifying earnings) and they contribute nothing. So you’re not out of pocket, the money is deducted from their salary.
Because the salary is lower, the employee will pay less National Insurance and therefore take home more pay. You will also pay less National Insurance, because pension salary sacrifice comes under the exemption list above.
A lower-rate taxpayer will take home an extra 8% of their pension contribution, and a higher-rate taxpayer will take home an extra 2%. Higher-rate taxpayers will also get their additional tax relief applied automatically which will give them an extra pay boost if they haven’t been claiming it previously.
As a quick example, an employee earning £40,000 and contributing 5% on full salary will take home an extra £160 per year.
As an employer, you’ll save 15% of their pension contribution through reduced NI payments. For the same example above, your yearly savings from reduced NI will be £300 per year. You can reinvest this into other employee benefits or use it for whatever your business requires!
Check out our explainer video here. And if you want to see how much your company could save, check out our quick calculator here.
Pension salary sacrifice is a no-brainer: it’s a great way to give your employees higher take-home pay and save money as an employer, too. Contact us to get yours started today!
2. Workplace nurseries
Although the old childcare vouchers scheme is no longer available under salary sacrifice, an alternative is offering workplace nursery places using the arrangement.
If your company isn’t large enough to have its own attached nursery, you may still be able to take advantage. To remain eligible, there are certain requirements that must be met to show that you are in partnership with the nursery. Working with an external provider can help you achieve this.
In this scheme, the employee will sacrifice an amount equivalent to their nursery fees. They will pay less NI and less income tax because of their lower salary. The tax saving significantly offsets the nursery fees, essentially making it much cheaper to take up a nursery place. This can be up to 50% of the total cost.
As an example, an employee earning £42,000 and paying £1,000 in nursery fees will save around £280 per month in tax costs, making £3,360 saving over a year.
As an employer, your NI savings will likely be used as part of the nursery partnership fee, so you may not be able to save extra for your company. This will depend on the deal you have with the provider, if you are using one. For example, working with Maji, you may be able to access additional savings through an exclusive partnership deal for our clients.
Being able to offer your employees reduced childcare costs will help address one of the biggest costs for families, radically reducing financial stress.
3. Cycle to work
With a bicycle or cycle to work salary sacrifice scheme, your employee can sacrifice their salary in exchange for bikes and associated equipment. Again, they will pay less income tax and NI, and you will pay less NI, too.
Employees save 28% of the cost through reduced tax and NI as lower-rate taxpayers, and 42% as higher-rate taxpayers. See here for more details.
As a quick example, a lower-rate employee spending £500 could save £140 over two years, whereas a higher-rate taxpayer could save £210.
As an employer, you’ll save 15% of that cost. So, on that £500, you’d get £75.
This could be a great way to encourage healthy and green habits for your employees at the same time as saving some money as an employer!
4. Pension advice
Employees can sacrifice their salary to pay for a portion of their fee for professional pension advice. This can be up to £500 in each tax year (see more on the eligibility criteria here). Accessing such advice can help employees plan their retirement and work out the best way to take their pension. This could lower their stress levels and shows them a high level of support from their employer.
The cost of the advice will be lowered through the NI savings made by the employee, and, again, you will save 15% of that cost (so £75 per employee spending £500 over the year).
5. Electric car scheme
Electric vehicle salary sacrifice is increasingly popular. While it’s not exempt from the benefit in kind tax(it’s quite low at 2% and will rise by 1% in April 2025), it’s a brilliant way to help employees get a new car in a more environmentally friendly way.
Employees sacrifice the cost of leasing a vehicle over a few years. Leasing an electric vehicle is not the same as purchasing it; at some point, the vehicle will be returned to the dealer. The advantage of this is that the employee does not need to bear the brunt of value depreciation (vehicles get less valuable over time, leading to a loss on resale). Additionally, the car can be replaced periodically without enormous cost, so as technology evolves, the driver can keep up!
Employees save money on their VAT, income tax, and NI through the scheme.
Their savings will depend on their tax bracket and the cost of the car, but as a quick example, an employee earning £36,000 per annum and leasing a car for £427 a month will save £111 per month.
You will make NI savings as an employer which you can choose to share with the employee. Depending on the provider you use, this should result in a neutral cost to you of running the scheme, and you’ll be able to provide a great benefit for your employees.
6. Technology salary sacrifice
Employees can sacrifice their salary to cover the cost of new technology, like laptops and phones. They can spread the cost across a year without needing a credit check, which can help make buying new tech more manageable. They’ll also benefit from saving 8% of the cost (as a lower-rate taxpayer). So, a lower-rate taxpayer spending £500 on tech would save £40 and would be able to pay monthly, too.
As an employer, you will need to account for benefit in kind tax, but again, the scheme is likely to be cost neutral to run.
What do you need to consider when setting up a salary sacrifice scheme?
These are just some of the available options. It’s well worth considering which ones would work well for your employees, because they can really help you boost the benefits you’re offering and make your employees feel happier and more supported.
There are a few considerations when embarking on these schemes. When you set up salary sacrifice, you need to make sure employees are fully educated about what this means, and the risks and benefits involved.
Salary sacrifice schemes are beneficial for the majority of employees. Some employees may worry that their reduced salary level will affect their mortgage applications; mortgage providers in general know about salary sacrifice, and will either base their calculations on take-home pay (which is higher through salary sacrifice due to reduced tax costs) or pre-sacrifice salary, which can be proved with a letter from you if needed.
Employees may need to consider carefully entering such an arrangement if they are going to receive statutory pay (like parental pay) in the near future.
You also need to make sure that you don’t take employees below National Minimum Wage or the Lower Earnings Threshold. You’ll need to have a way of assessing their eligibility and applying caps on the sacrifice if necessary.
