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Our experts can talk you through available benefits including child care vouchers and additional pension contributions and we’ll keep you updated as legislation changes to ensure you remain compliant.
Importantly, we can then convey the benefits, and risks, of Salary Exchange to your employees. We do this for many of our clients, often in tandem with other financial education topics like retirement planning.
Salary sacrifice (sometimes known as salary exchange) is an agreement between employer and employee, where the employee agrees to a reduction in their salary to for other non-cash benefits from their employers including pension contributions, childcare vouchers, bus passes etc.
At its most basic, everyone pays less tax and exchanges this for access to other benefits. As employees’ gross wages are smaller, they pay less income tax and National Insurance (NI), and the employer saves on NI too. Employees may be hesitant to reduce their pre-tax salary, but there are benefits for both employee and employer.
With Salary Sacrifice, employees and employers can pay tax savings into the employee’s pension pot – helping them increase their retirement savings. Employers could choose to improve (or create) their employee benefits package thanks to these savings.
Every employee between 22 and the State Pension age who earns more than £10,000 each year should be enrolled into a workplace pension scheme. Switching to Salary Sacrifice for all of these employees can be complicated and costly as employment contracts will need to be amended and payroll updated.
To complicate matters further, employees are able to opt in and out – and this will affect their terms of employment, which must be kept up to date.
Employees should consider what a reduced gross salary could mean for them. Salary sacrifice can affect the amount of cash they receive each month, how much they can borrow (as credit providers calculate this on salary), and other earning related benefits including their State Pension, Life cover and maternity pay.
Employees can also decide how much they would like to sacrifice, but this will depend on their employment contract, and their take home salary must not fall below minimum wage.
Faster growing pensions – Employees can use salary sacrifice to increase the total contributed to their pension each month. This can lead to a higher retirement income, and a better future quality of life.
Access to more benefits – Workplace schemes can allow employees to access a range of benefits they otherwise would not be able to afford such as Life Assurance or Critical Illness Cover.
How can Wren Sterling help me?
That’s where Wren Sterling’s Workplace team can help. We help our corporate clients manage their workplace pension schemes and communicate the benefits of their scheme to their employees, to maximising their return on investment.
No, and employees can opt out of salary sacrifice at any time. However, if employees are making use of non-cash benefits like the cycle-to-work scheme, they may have to pay off the balance of the agreement, or the value of the bike, depending on the plan details.
It is not mandatory for employers to provide Salary exchange (salary sacrifice).
Tax does not need to be paid on the salary that is sacrificed.
Salary sacrifice cannot be used to reduce an employee’s salary to less than minimum wage.
Employees can also decide how much they would like to sacrifice, but this will depend on their employment contract, and their take home salary must not fall below minimum wage.
Eligible employees must be enrolled in their employer’s workplace pension. It is mandatory for the employer to offer this, but the employee can opt out of a workplace pension. For salary sacrifice, employers need to ask employees if they wish to be part of the sacrifice arrangement. These are two separate arrangements, working together.
Salary sacrifice is not available if you are self-employed unless you are a Company Director of your own limited company and pay yourself dividends. We recommend anyone who is self-employed, who naturally has more complex pension arrangements, to get in touch with us for financial advice.
Employees do not pay tax (including National Insurance) on the sacrificed amount.
Whether an employee will receive a state pension depends on their National Insurance record, so it is possible that this could affect your eligibility.
The Financial Conduct Authority do not regulate tax planning.
The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.
