Among the list of responsibilities that you have as a business owner, keeping your team happy is no doubt near the top. These individuals are a crucial resource for growing your business, so treating them fairly and well is paramount.
A competitive salary is certainly one way of doing this, as is offering a generous benefits package that suits their needs. In fact, you may have read our previous article about why it is so important to offer useful employee benefits to your team members.
Interestingly, another form these benefits can take is through offering a salary sacrifice scheme. These arrangements could become increasingly popular as tax bands are frozen and so employees may be facing higher bills.
Yet, according to the Guardian, while many larger employers offer these schemes, only about 5% of small or medium-sized enterprises (SMEs) do the same. So, creating an arrangement like this in your company could further differentiate you in the marketplace of employers.
Crucially, salary sacrifice can also benefit your business as well as your team members, meaning there is potentially an advantage for you in creating a scheme.
So, read on to find out how salary sacrifice works, and how it could help both your team and your business.
Exchanging a portion of salary in return for another benefit
Salary sacrifice is a government-backed initiative that involves your employees reducing their salary in exchange for another benefit, often a non-cash benefit. Both employee and employer must agree to this change in employment terms before it comes into effect.
In most cases, if an employee receives a valuable benefit like this from an employer, it would be treated as a “benefit in kind” by HMRC. The employee would then owe the associated Income Tax subsequently on a P11D tax form.
But, certain benefits that you can offer under salary sacrifice fall outside the rules, allowing you to give them to your employees without them facing a tax bill down the line.
Common options for benefits that employees can tax-efficiently receive in exchange for a lower salary include:
- Additional employer pension contributions
- Pension advice that is supplied by the employer
- Employer-provided childcare, such as a workplace nursery or childcare vouchers
- Bicycles and cycling safety equipment, including the cycle-to-work scheme.
Of these options, arguably the most preferred is additional pension contributions. You can find out why below.
Your team could potentially cut their tax bills and become eligible for certain tax breaks
The first and most tangible benefit of salary sacrifice is that it is potentially a way for your team members to make their wealth more tax-efficient.
By reducing their take-home pay, your employees will often pay less in National Insurance (NI) and Income Tax.
This can be particularly powerful if they are on the boundary of a higher tax bracket and are looking for a pay increase. For example, the 40% higher-rate band starts at £50,270, where it is frozen until at least 2028.
If you had an employee earning £50,000 who you wanted to give a 5% increase to, taking their salary to £52,500, part of their income would now be in the higher-rate band.
Meanwhile, if they instead maintain their take-home pay and receive £2,500 in eligible sacrificed benefits instead, they will remain in the basic-rate band, while still receiving the same value of the pay increase.
This works for certain benefits, too, such as the Child Benefit high income charge that we have written about before.
Under the current rules, if you or your partner have an adjusted income of £60,000, you will start to see your Child Benefit payments reduced, tapering off entirely at £80,000.
A salaried pay increase could take an employee above the £60,000 threshold so that their Child Benefit started to fall in value. So, you could instead offer a sacrificed benefit that keeps their take-home pay the same while allowing them to maintain their full entitlement to Child Benefit.
These are the types of opportunities that salary sacrifice can afford your team.
Allowing your team to tax-efficiently boost their retirement savings
Perhaps the most powerful way to use salary sacrifice is by you making additional employer pension contributions.
Rather than receiving their salary that is then subject to NI and Income Tax deductions, you can contribute this directly into their pension.
These contributions are fully tax-relievable, meaning your employees essentially see what they would have to pay in tax added to their pot instead.
This can help them build a healthier fund for the future, while making their wealth more tax-efficient.
You could cut the National Insurance bill you pay in your company
The advantages of salary sacrifice extend to your business, too, as it also reduces your NI obligations.
When your employees reduce their salaries or choose an eligible benefit over a pay increase, you either cut or do not have to pay additional Class 1 NI contributions on this salary.
If multiple team members take up the option of salary sacrifice, this could save you a healthy sum. Furthermore, you could use this as an incentive for your employees to do so by offering to give them the equivalent value of what you saved in NI.
For example, if they choose additional pension contributions in lieu of a pay rise, you could contribute what you have saved in employer NI into their pot.
It is important to make sure that salary sacrifice suits you, your business, and your team
Of course, before you make any large decision in your business like this, it is first worth ensuring that it suits everyone involved.
In large part, this will come down to whether your employees want to use the scheme. To help them make an informed decision, it is important to share some of the drawbacks about salary sacrifice with them first.
While they can ultimately benefit financially from salary sacrifice, it does involve reducing their take-home pay in the short term. This could have knock-on effects, including impacting:
- Mortgage affordability. As this is usually partially calculated from earnings, your team members may not be able to borrow as much if they choose to reduce their salary in exchange for other benefits.
- A workplace death in service arrangement. This will also typically be linked to their earnings, meaning a lower payout for beneficiaries if your employee takes salary sacrifice and the worst happens.
- Eligibility for state benefits. For example, it could affect their entitlement to Statutory Maternity Pay.
It is crucial to ensure that your team members understand these stakes before they agree to salary sacrifice.
Furthermore, it is worth gauging interest in a salary sacrifice arrangement before you put one in place. It could be time-consuming to investigate and create a framework for this, only to discover that no one in your company wants to take up this option.
Get in touch
Want to find out more about managing your wealth as a business owner? Please do get in touch with us at DBL Asset Management.
Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate tax planning.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
