Salary sacrifice schemes allow employees to exchange part of their cash salary for a non cash benefit, such as pension contributions or childcare vouchers. By reducing the employee’s gross salary, these arrangements can lower both income tax and national insurance contributions, making them one of the most tax efficient ways to provide valuable benefits as part of an employee benefits package.

However, there are important rules to follow. Cash earnings must not fall below the National Minimum Wage, and the employee’s contract must be updated to reflect any changes in non cash entitlements.

How Salary Sacrifice Arrangements Work

A salary sacrifice agreement is a change to an employment contract where an employee agrees to a salary reduction in exchange for receiving non cash benefits. For example:

• Giving up part of a salary in return for workplace pension schemes
• Using a cycle to work scheme for bicycles and safety equipment
• Receiving childcare vouchers or access to a workplace nursery
• Accessing employer-provided pension advice

By using pre tax salary, the employee pays less employment income tax and benefits from lower national insurance contributions. At the same time, both the employer and the employee may enjoy national insurance savings, making these arrangements attractive to businesses that want to offer salary sacrifice schemes through an employee benefits platform.

Flexibility and Life Events

Salary sacrifice options must be flexible enough to adapt to significant life events. Employees may need to change or leave an arrangement if they experience:

• Marriage or divorce
• Pregnancy and statutory maternity pay
• Illness requiring statutory sick pay
• A partner’s redundancy pay

In these cases, salary sacrifice arrangements can be altered to ensure the employee’s entitlement and wider benefits package remain fair and practical.

Tax Benefits of Salary Sacrifice

The main benefits of salary sacrifice come from the tax savings available on specific non cash benefits. HMRC currently allows the following to be exempt from both income tax and national insurance contributions charge:

• Pension schemes and pension contributions
• Employer-provided pension advice
• Workplace nurseries
• Childcare vouchers (if contracted before 4 October 2018)
• Cycle to work schemes for bicycles and safety gear

These exemptions can make a salary sacrifice benefit one of the simplest ways to save money, while also improving employee satisfaction with a more comprehensive employee benefits package.

Impact on Employer Contributions

When part of an employee’s gross salary is exchanged for a workplace pension or similar scheme, the reduction in salary also reduces the employer’s national insurance contributions liability. This means both the employer and the employee benefit financially.

Employers can also align these schemes with a minimum contribution requirement for pensions, ensuring compliance while building a stronger benefits package that supports increased employee satisfaction.

Considerations and Risks

While salary sacrifice work can deliver significant tax benefits, there are also factors to be aware of:

• Salary exchange may reduce an employee’s ability to prove income for loans, mortgages, or working tax credit eligibility.
• Lower taxable income can affect entitlement to other tax credits.
• Care must be taken to ensure minimum wage thresholds are met.

Employers should clearly document all salary sacrifice agreements in the employee’s contract and communicate the tax implications as part of their flexible benefits offering.

Why Offer Salary Sacrifice?

For businesses, introducing salary sacrifice options through an employee benefits platform is an effective way to:

• Deliver valuable benefits that employees value
• Provide one of the most tax efficient ways to build a strong benefits package
• Support employee satisfaction and retention
• Achieve national insurance advantages for both the employer and the employee

Handled correctly, salary sacrifice schemes can be a win-win arrangement that helps employers create a competitive employee benefits package, while enabling employees to receive non cash benefits and enjoy real tax savings. HLWA can help!

Source: HM Revenue & Customs | 03-03-2025