The pros and cons of salary sacrifice

What is salary sacrifice? 

Based simply on its name, salary sacrifice might not necessarily sound like an appealing prospect. However, the reality is that it can be a very cost-effective and tax-efficient benefit both for employers and employees.

Put simply, a salary sacrifice agreement means an employee will give up a portion of their salary in exchange for a non-cash benefit; this could be anything from a company car to childcare vouchers. More commonly, employees choose to exchange part of their gross income for increased pension contributions from their employer.

Note: Within this scheme, an employee’s salary legally must not fall below the National Minimum wage.

The pros

As well as allowing employers to provide an improved benefits package to their employees, offering salary sacrifice has several advantages:

• Because the employee’s income is lower, the amount of income tax that they pay on it will also be lower.
• Both the employer and employee pay less in National Insurance Contributions (NICs).
• Any tax savings can be paid into the employee’s pension pot – helping them save even more for the future.
• Employers can reinvest the money they’ve saved back into the business.
• Salary sacrifice can improve employee satisfaction rates and consequently retention.

The cons

While there are benefits to salary sacrifice, giving up a part of your income is something you should always think carefully about, particularly in these uncertain economic times.

There are some potential disadvantages to also take note of:

• Having a lower salary may affect the amount you are able to borrow for a mortgage.
• Your entitlement to certain State benefits, such as Statutory Maternity Pay, might be affected.
• Your life cover could be affected. As it is usually worked out as a multiple of your salary, your employer might provide less life cover if you sacrifice some of your salary.
• If you’re in a defined benefit scheme and you leave it in the first two years, you might not be able to get a refund of your contributions. This is because any salary sacrifice contributions would count as employer contributions.

Is it time to review your employee benefits arrangements?

Businesses that offer their people a range of benefits are far more likely to attract top talent to their teams.

Our experienced financial advisers can help you review your existing employee benefits arrangements and propose a range of relevant options that align with your business objectives, add value for your employees, and enhance your reputation as an employer.