In a Salary Sacrifice scheme (or Salary Exchange), the employee agrees to give up part of their gross salary for a non-cash benefit. This scheme is mostly known to boost employees’ pension pots.
It has many benefits, for both employees and employers.
If you’re an employee, Salary Sacrifice:
- reduces your Income tax and NICs
- increases your take-home pay
- and you get to exchange part of your salary for a non-cash benefit, such as a company car.
If you’re an employer, it:
- increases your company savings,
- reduces your employees’ NICs,
- and improves employee satisfaction rates and consequently retention.
It is a very tax-efficient way of saving into a pension and Husky makes that possible. We take care of setting up the Salary Sacrifice scheme and workplace pension for you, manage it and ensure you’re compliant. We help employees save more and employers keep more.
Let’s see how it works and with what benefits you could exchange part of your salary.
How Salary Sacrifice works
You cannot be auto-enrolled in a scheme such as this one. You have to agree for your employer to make a Salary Sacrifice deduction. This is because you have to officially agree to reduce your salary in exchange for company perks.
Also, in this scheme, your salary shouldn’t fall below the National Minimum wage. It is illegal to reduce your salary when you’re already earning a lower salary.
The idea behind this scheme is that the employer takes part of their salary from the employee and exchanges it for a non-cash benefit.
This means that you don’t make pension contributions to your workplace or personal pension as before, but they are made by the employer instead. Your employer now pays into your pension directly from your salary. You both also continue contributing to National Insurance, which ensures you get the State Pension once it’s time.
Let’s use an example with numbers to understand how Salary Sacrifice works.
Bob earns £35,000 in 2022/23. He is auto-enrolled to a pension scheme, without Salary Sacrifice.
- He contributes 5% of his earnings to his pension, saving £1,750 annually.
- His employer contributes the minimum 3% of Bob’s earnings to his pension, adding £1,050 per year.
- He pays £277 in NICs each month, while his employer adds £315 to his National Insurance.
Bob earns £35,000 per year and he’s in a Salary Sacrifice scheme with his employer. He has agreed to give up part of his salary to boost his pension.
- He gives up 5% of his gross salary and adds it to his pension. £1,750 goes straight to his pot before deducting tax.
- Tax and NI contributions are calculated on the rest of £33,250.
- He now pays £258 in NICs each month, saving £232 annually in NICs.
- His employer adds £293 to his record each month, saving £263 annually. The employer can choose to add to the employee’s pension or invested the cash to the business.
With Salary Sacrifice, you get more now and have more later. Both employees and employers reduce their taxes and save money. You can now calculate your potential savings using Husky’s smart calculator. See for yourself how a Salary Sacrifice scheme can benefit your finances.
As you can see, this scheme is very tax-efficient. When you agree to reduce your gross salary, tax is calculated on a lower income than before. The same principle applies to National Insurance contributions.
Non-cash benefits you could exchange part of your salary
A pension is not the only non-cash benefit you can get for exchanging part of your salary. Companies offer various perks in Salary Sacrifice schemes. Make sure that you’re aware of what you’re exchanging your salary with.
In a Salary Sacrifice scheme, you could be offered:
- cycle-to-work scheme,
- directly contracted employer provided childcare,
- ultra low emissions vehicles,
- intangibles such as more annual leave.
Speak to your employer about your benefit options in a Salary Sacrifice scheme. It is important that you are happy with the benefit you’re agreeing to receive. You’re also ensuring that it is a fair agreement and fair exchange between the two of you.
Once you’re in agreement with your employer, we take care of the rest. Husky will handle the paperwork and legal processes for you, making sure you’re end-to-end compliant each tax year.
As an employee, before committing to a Salary Sacrifice scheme, pay attention to the following:
- that your salary will remain above minimum wage.
- Any state benefits, such as sick pay or maternity and paternity pay, won’t be decreased.
- Your ability to apply for a mortgage or a loan is not affected.
Be aware of what you’re agreeing with your employer. This agreement should be as much beneficial as it is to your employer.
As an employer, make sure you’re compliant. A Salary Sacrifice changes the contract between you and your staff. Husky can take care of that for you. We deal with any legalities around pension schemes such as this one, ensuring our clients are compliant with regulations.
Husky unlocks the benefits of Salary Sacrifice.
Let Husky take care of the admin for you and set you up with a Salary Sacrifice scheme.
It’s a cost-effective and tax-efficient employee benefit. It’s a win-win for both employees and employers as they both save more.
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