What Is A Salary Sacrifice Scheme?

12 July 2021

What Is A Salary Sacrifice Scheme?

What Is A Salary Sacrifice Scheme?

With increasing scrutiny on vehicle emissions, many leading organisations and stakeholders are working towards schemes and incentives to encourage the use of electric vehicles (EVs) and hybrid vehicles within their workforce. These schemes are designed to bring mutual benefits for both the employee and the employer. Salary sacrifice is one of these, and is perhaps the best example of such a scheme, but it doesn’t only apply to low-emission vehicles.

Salary sacrifice schemes explained

The definition of salary sacrifice schemes is actually quite literal, and that might seem odd upon first reading, but it can make good financial sense. Essentially, an employee agrees with their employer to give up part of his/her salary in exchange for a non-cash benefit. This can vary from one employer to the next, but common examples include extra pension contributions, a mobile phone, childcare, training courses, additional annual leave and, increasingly commonly, contributions to ultra-low or zero emission vehicles. 

How does salary sacrifice work?

Your employer has to opt into a scheme which is available to all employees. You then sign up and agree a portion of your salary to be taken from your monthly pay and what you receive in return. The amount you sacrifice and what you get in return is completely open for negotiation between the employee and the employer. 

Most employers allow you to opt out of the scheme at any time, depending on how flexible they are, but you need to bear in mind that this is a contractual agreement. Also, if you own something obtained through the scheme and still have outstanding payments due, such as a mobile phone, then you are still responsible and liable for those payments, and bound by the original terms, even when you have opted out of the scheme. 

What are the tax benefits for the employee?

From 6th April 2017, employees who agree a salary sacrifice scheme for the following:

  • Increasing pension contributions
  • Employer supported childcare
  • Cycle to work schemes
  • Ultra-low emission cars (less than 75g/km CO2)

will have their salary portion deducted BEFORE it is subjected to income tax and national insurance payments. And so because the portion is deducted on gross pay, the real cost to the employee is reduced, and furthermore, because the amount you are paid is reduced, so too is the amount of income tax and national insurance that you pay. This applies to the amount of national insurance the employer pays also. So, essentially, more of your salary is used to benefit you, rather than HMRC.

Salary sacrificed for other non-cash benefits we have mentioned, such as mobile phones, training courses, additional leave etc, will be taken AFTER tax and National Insurance is deducted. But if you were enrolled on such a scheme before 6th April 2017, it will have remained valid up to April 2021, or until the scheme ended with the employer, whichever was sooner.

Considerations when looking at a salary sacrifice scheme

  • You can adjust salary sacrifice arrangements in the event of a lifestyle change which could affect your overall income, such as if you become married, divorced, ill or a partner is made redundant or becomes pregnant.
  • Employers can be fined if salary sacrifice takes an employee’s earnings below the minimum wage.
  • Reducing your monthly salary means that standard pension contributions (by employee and employer) will also be reduced.
  • A salary sacrifice could also affect other payments based on average earnings over a fixed period, such as maternity/paternity pay and sick pay. 

Pink Salary Exchange

The Pink Salary Exchange is a salary sacrifice scheme and is approved by HMRC. Through this scheme an employee can receive a brand new zero emission EV, or an ultra-low-emission hybrid vehicle in return for sacrificing an agreed portion of their salary. This is a managed process dealt with by us, and the deduction is taken from the employee’ gross salary, as per the April 2017 changes. 

We believe this scheme brings obvious benefits to the employee, but also to the employer, in terms of lower fleet costs, lower CO2 emissions, better morale and productivity and the retention of good employees. 

Contact the team here at Pink Salary Exchange today and see how a salary sacrifice scheme can benefit your organisation and its people.   

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