In light of National Payroll Week, we’ve covered some of the basics around salary sacrifice schemes, including how these work and the benefits and drawbacks these present for both employees and employers.
What is Salary Sacrifice?
Salary Sacrifice is a contractual arrangement between an employee and an employer whereby the employee agrees to receive a reduced amount of earnings per month in return for a non-cash benefit such as; childcare vouchers, car hire or lease scheme, pre-paid store cards or even an employer pension contribution.
As an employer, you can set up a salary sacrifice arrangement upon request of an employee, by simply altering the terms of the employees’ employment contract. Before doing so, you must ensure your employees cash earnings do not drop below the National Minimum Wage (NMW) rate.
View the latest updates to the recent Minimum wage increase here.
Changing the terms of a salary sacrifice agreement
Throughout an employee’s working life, it is more than likely that their financial circumstances will change meaning they may wish to change the terms of their salary sacrifice agreement. If an employee chooses to do so, you must change the employees’ contract within due course.
Reasons for wanting to alter their salary sacrifice agreement may include:
- COVID-19 financial impact
- Drastic relationship status changes i.e., marriage or divorce
- A partner facing redundancy
- A partner becoming pregnant
What are the benefits and drawbacks of a salary sacrifice?
Opting into a salary sacrifice scheme may not suit everyone’s individual circumstances and financial status.
It’s important that when offering salary sacrifice option to employees, the benefits and drawbacks are clearly distinguished. They must also be aware of any cash and non-cash entitlements and how salary sacrifice may affect terms of payments.
Below is listed some of the benefits and drawbacks of a salary sacrifice for both employers and employees.
Benefits:
- A scheme which helps enhance employees’ financial wellbeing
- Reduces employees Income Tax
- Reduces both your businesses and employees National Insurance
- Increase of take home pay for employees
- Option of employer paying part or all of employees’ NIC saving into pension
Drawbacks:
- Lower salary may mean employees are liable to borrow a smaller amount for a mortgage
- Employees’ entitlement to specific state benefits may be affected
- Employees may be entitled to less life cover as this is usually worked out as a multiple of your salary
- If employees leave the scheme in the first two years, they may not always get a refund of any contributions
For further detail on the benefits and drawbacks of a salary sacrifice you can visit Money Helper.
Need further support?
You can head over to our ‘Debunking Pensions’ blog for further information on the latest pension legislation.
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