Salary sacrifice is an arrangement between an employer and an employee where the employee agrees to give up part of their salary in exchange for non-cash benefits. This practice can be beneficial for both parties, as it often leads to tax and National Insurance (NI) savings. However, it’s crucial to weigh the pros and cons before deciding if a salary sacrifice scheme is right for you.

How salary sacrifice works

In a salary sacrifice arrangement, an employee agrees to reduce their cash salary by a certain amount, which is then used to provide benefits such as:

• Pension contributions
• Childcare vouchers
• Cycle to work schemes
• Ultra-low emission cars

These benefits are often exempt from tax and NI contributions, making the scheme financially attractive.

Pros of salary sacrifice

1. Tax Savings: By reducing your gross salary, you pay less Income Tax and NI contributions. This can result in significant savings over time.
2. Enhanced Benefits: Employees can enjoy benefits that might otherwise be unaffordable or unavailable.
3. Employer Savings: Employers can also save on NI contributions, which can be reinvested into the business or passed on as further benefits to employees.
4. Retirement Planning: Increased pension contributions through salary sacrifice can lead to a more secure financial future.

Cons of salary sacrifice

1. Reduced Take-Home Pay: The most immediate impact is a lower net salary, which can affect cash flow and budgeting.
2. Impact on Benefits: Some state benefits and entitlements, such as Statutory Maternity Pay and State Pension, are based on your gross salary. A reduced salary might affect your eligibility or the amount you receive.
3. Complexity: Implementing and managing a salary sacrifice scheme can be administratively complex and requires careful planning and communication.
4. Pension Limits: Increased pension contributions through salary sacrifice might lead to breaching annual or lifetime pension contribution limits, resulting in additional tax charges.

Seek expert advice

While salary sacrifice can offer substantial benefits, it’s essential to fully understand the implications. Employees should consider their personal financial situation and future plans, while employers need to ensure compliance with HMRC regulations and effective scheme management.

Our payroll services can help you navigate the complexities of salary sacrifice arrangements. We work closely with financial advisors to provide tailored solutions that align with your financial goals and compliance requirements.

Why choose our payroll services

• Comprehensive Support: From scheme setup to ongoing management, our payroll experts provide full support to ensure smooth implementation.
• Customized Solutions: We tailor our services to meet the unique needs of your business and employees.
• Compliance Assurance: Stay compliant with the latest HMRC guidelines and avoid potential pitfalls.
• Partnered Financial Advice: Through our trusted financial advisors, we offer personalized advice to help you make informed decisions.

By understanding and leveraging salary sacrifice arrangements, both employers and employees can achieve substantial financial benefits. Ensure you’re making the most of these opportunities by seeking expert advice and comprehensive payroll support from our team. 

Michelle Martin

Managing Director | Accace Adept

Book a meeting with Michelle