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What is salary sacrifice?

Ceridian expert Simon Parsons takes us through salary sacrifice and outlines its benefits for employers.

Definition: Salary sacrifice is a contractual agreement between an employee and their employer to reduce contractual pay in return for the employer providing an alternative benefit in kind which enjoys certain tax or National Insurance reliefs.

Why use salary sacrifice?

Salary sacrifice can be an effective way to make certain benefits more affordable for the employee and aid employee-wellbeing.

Often in the provision of a salary sacrifice arrangement the employer benefits by saving 13.8% of the sacrificed amount which would normally have been payable to HMRC as secondary NICs. So if your pension contributions are £100,000, you could save £13,800 per year.

What employee benefits are offered via salary sacrifice?

The following benefits have proved popular in recent years and can be started and stopped at any time:

  • Pensions
  • Child Care
  • Company cars
  • Car Parking at or near a place of work

The following are popular but are subject to a minimum longevity term of 12 months (unless there is a significant life style change, like a marriage or house move):

  • Medical Insurance
  • Dental Insurance
  • Retail Vouchers
  • Cycles to work
  • Holidays

Salary sacrifice for auto-enrolment

With the onset of workplace pensions and auto-enrolment, the majority of early staging employers embraced salary sacrifice to enable some savings to be enjoyed to offset an element of the employer administration and contribution pension costs.

Administering salary sacrifice

The mention of salary sacrifice arrangements often sends fears of complex calculation and convoluted arrangements to avoid tax. The reality is that their operation is much easier to administer than thought with automation of these calculations through your payroll system simplifying the process.

Ceridian’s payroll system for example administers salary sacrifice arrangements in an automatic way applying any tax and NICs savings for the employee and also applying the employer NIC savings as well. For some larger employers the value of savings has amounted to millions of pounds.

Who qualifies for salary sacrifice?

Consideration needs to be made to statutory rights and the impact of salary sacrifice. Employees cannot sacrifice pay to below National Minimum Wage, so low paid workers are not suitable for such arrangements.

Those earnings near the National Insurance Lower Earnings Limit (LEL) equally may find themselves removed from qualifying for state benefits. However, employees who earn enough to be auto-enrolled into a work place pension are earning above both the NMW and LEL and are likely to be suitable for salary sacrifice pension contributions.

Is it time to explore the options for salary sacrifice – I would suggest yes, it could really help save employer costs.

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Contact us to find out how we can setup salary sacrifice arrangements on your payroll.

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