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 scheme you can set up to gain even more benefits?
In this article, we’ll cover some of the main options and how they could have a positive impact on you and your employees.
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
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)
- Electric car leasing
- Health/dental/life insurance
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
At Maji, we can support you with:
- Pension salary sacrifice
- Workplace nursery salary sacrifice
- Electric car salary sacrifice
- Cycle to work salary sacrifice
- Technology salary sacrifice
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.
Salary sacrifice pension arrangements
In case you haven’t been avidly reading Maji’s blog and LinkedIn page, 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) 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 12% 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 will take home an extra £202.56 per year.
As an employer, you’ll save 13.8% of their pension contribution through reduced NI payments. You can reinvest this into other employee benefits or use it for whatever your business requires!
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. Find out more about how to run a successful switch here.
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 £32,000 and paying £1,000 in nursery fees will save around £320 per month in tax costs, making £4000 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 can 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.
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 32% 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 £160 over two years, whereas a higher-rate taxpayer could save £210.
As an employer, you’ll save 13.8% of that cost. So, on that £500, you’d get £69.
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!
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 13.8% of that cost (so £69 per employee spending £500 over the year).
Electric car scheme
Electric vehicle salary sacrifice is increasingly popular. While it’s not exempt from the benefit in kind tax, 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 £26,000 per annum and leasing a car for £427 a month will save £185 per month.
You will make NI savings as an employer, but you’ll also need to pay the benefit in kind tax. 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. Working with Maji, you’ll also get an extra cost saving as an exclusive deal for our clients.
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 12% of the cost (as a lower-rate taxpayer). So, a lower-rate taxpayer spending £500 on tech would save £60 and would be able to pay monthly, too.
As an employer, you will need to pay benefit in kind tax on this salary sacrifice, but again, the NI savings will neutralise this so you won’t end up paying anything.
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.