The Complete Guide To A Salary Sacrifice Scheme

09 November 2022

The Complete Guide To A Salary Sacrifice Scheme

In a tough economic climate employees are looking for help with the cost of living wherever they can get it, and increasingly, employers are acknowledging their duty to provide this support. But then things are tough for businesses too, so creative and innovative solutions are the way forward and an increasingly popular one is a salary sacrifice scheme; a mechanism for creating benefits for the employee, but also the employer.

Here is our Complete Guide To A Salary Sacrifice Scheme with everything you need to know…

What is a salary sacrifice scheme?

A salary sacrifice scheme is a voluntary initiative set-up by an employer, whereby an employee’s salary is reduced by a specified amount in return for a non-cash benefit. The terms of an employee’s contract will be amended to cover this new arrangement. A salary sacrifice scheme must be entirely voluntary and an employee can opt into it at any time, they can also have the amount of salary that is sacrificed amended to reflect lifestyle changes, such as a divorce, a marriage or if a partner is made redundant or becomes pregnant. An employer must also ensure that any portion of salary taken from an employee does not reduce their salary below the minimum wage.

When an employee decides to opt into a salary sacrifice scheme the non-cash benefits on offer from the employer must be made clear and the employee can subsequently choose one. The employer should also ensure the employee receives information and advice as to how the proportion of salary they are losing will affect things like pension, sick pay and holiday entitlement etc. In most cases an employer will arrange information workshops which employees are free to attend, and in which the various benefits and effects the salary sacrifice scheme will have can be fully explained before an employee commits to it.

Why should an employee choose a salary sacrifice scheme?

Willingly reducing your salary at a time when every penny counts may seem like a strange thing to do, but there are numerous benefits to doing so, not least because of the non-cash benefit you receive in return. The benefits which qualify for the salary sacrifice scheme usually include:

  • childcare vouchers
  • cycle to work scheme
  • car hire/lease scheme
  • home computers
  • car parking
  • gym membership
  • pre-paid store cards
  • additional pension contributions
  • additional holiday entitlements

The range of benefits offered is entirely down to the employer, but in most cases they represent a benefit which the employee will not be able to find elsewhere – at least not in such a financially beneficial format – and be able to access so conveniently.

However, the most appealing element of a salary sacrifice scheme is that the portion of salary is taken from an employee’s gross pay, but as of April 2017, only in the case of five specific benefits, all of which are among the most popular types of schemes. This means that the employee will be liable to pay reduced income tax and national insurance contributions, and hence, in real cash terms they will be better off if they opt to choose one of the following benefits:

  • Increasing pension contributions to registered pension plans
  • An employee securing advice on their pension
  • Employer supported childcare
  • Cycle to work schemes
  • Ultra-low emission cars (emissions under 75 grams of CO2 per kilometre)

So if an employee chose one of these benefits they would also pay less tax and national insurance. Though of course, the ultimate decision remains whether the non-cash benefit is worth as much to the employee as the portion of salary being given up. This is not always a case of swapping one figure for another, but can involve a balance of consequential lifestyle benefits in addition to cash savings.

Who is a salary sacrifice scheme aimed at?

Anyone within an organisation can apply for a salary sacrifice scheme and with many schemes there is no credit check involved either. And the beauty of a salary sacrifice scheme is that you can choose the non-cash benefit that best suits you. And because the scheme is voluntary you can weigh up the options and work out the true value of the benefit. So for example:

  • If you have a young family but both parents wish to work and bring in income: childcare vouchers may provide a lifeline which allows both partners to work and introduce some much-needed freedom and independence as well as income.
  • If you want to transition to cheaper and greener motoring: leasing a low-emission car can save you money and reduce your carbon footprint.
  • If you have an easier commute and are interested in health and fitness: a cycle to work scheme is an even cheaper and cleaner method of transport and is great for physical and mental health.
  • If you are wanting to build-up more of a nest egg for your retirement: additional pension contributions can provide a great boost to your savings.

These benefits all qualify for the reduction in tax and national insurance, but there are several other benefits which might provide the lifestyle enhancement that you are looking for, and which can therefore justify the reduction in salary you would see.

Why employers should offer a salary sacrifice scheme

While the headline benefits of a salary sacrifice scheme are financial, there are other human resources benefits which an employer should bear in mind when considering whether to offer such a scheme in the workplace.

In today’s business climate an employer needs to offer attractive packages to tempt the best employees, and salary sacrifice schemes come into that equation. Offering such a scheme demonstrates that the employer is considerate and is serious about their commitment to employees’ welfare. This can offer the employer a significant advantage in attracting and retaining the best employees.

Furthermore, if an employer offers a salary sacrifice scheme, it has to be available to everyone across the organisation. In the past, if an employee was offered a company car, for example, it was seen as a status symbol which only elite performers were offered. This promoted exclusivity rather than equality. With a salary sacrifice scheme this benefit is available to everyone and hence demonstrates diversity and inclusivity, this in turn can boost morale and productivity and ensures the employer has a happy, loyal and motivated workforce.

What are the benefits of a salary sacrifice scheme?

A salary sacrifice scheme can be mutually beneficial for both the employee and the employer. This is because for the employee:

  • Employees enjoy a nett cash benefit because while they are receiving less salary they are also paying less income tax and national insurance.
  • This cash benefit allows the employee to save money or use money in a way that better suits them and their priorities.
  • Employees are able to create a better work-life balance by choosing the benefit which has the most positive lifestyle effect.
  • Employees are receiving a benefit they could not access elsewhere in the same way.

For the employer there is a slightly different set of benefits:

  • The employer also enjoys savings on their own national insurance contributions.
  • With a salary sacrifice scheme the employer knows they are enabling their employees with a way to better manage their health and wellbeing, as well as their financial wellbeing.
  • The employer can use the salary sacrifice scheme as a key element of a remuneration package which can help to attract and retain the best talent, and helps with compliance in terms of diversity and inclusivity.
  • A salary sacrifice scheme is very easy to set-up and manage and most schemes come with extensive supporting literature and FAQs, to ensure employees are fully informed and the scheme is not heavy on training and administration.

Which is the best salary sacrifice scheme to choose?

An employer has to treat all their employees on equal terms, and as such, everybody has different needs and circumstances and hence, there are advantages in all the non-cash benefits which can be offered by an employer. However, the five benefits which qualify for the gross pay reduction and hence the reduced tax and national insurance contributions, as outlined above, are clearly front-runners when assessing the best salary sacrifice schemes.

Within this group, the option to access a leasing deal for a low-emission vehicle is generally considered to be the best option for an employee, and for a number of reasons:

  • Car leasing results in the employee paying less tax and national insurance.
  • Car leasing is cheaper than buying a car because you are only paying for the vehicle’s depreciation over the length of the lease term, rather than paying to own the car outright.
  • The financial model of a car leasing agreement is also likely to be cheaper than a high street loan to finance a car purchase.
  • Low-emission vehicles are exempt from road tax.
  • Day-to-day motoring for a hybrid or full electric vehicle is much cheaper than running a petrol or diesel vehicle.
  • Running a low-emission vehicle is better for the environment and improves your individual carbon footprint.
  • With a car leasing deal you are always driving a new vehicle and hence can benefit from all the tech developments in fuel efficiency, safety and in-car entertainment and comfort.
  • If you lease your car then you may be able to sell your current car and provide yourself with a handy lump sum of cash.
  • A car leasing deal allows you to spread your payments and therefore budget more easily for your motoring expenses.
  • Most car leasing deals offer you the option of including service and maintenance, which means all your motoring expenses are included in one easy payment. Furthermore, because you are always driving a new vehicle, you should experience very little service and maintenance costs anyway.

Given the comprehensive range of all-round financial and lifestyle benefits of a salary sacrifice car scheme, it is widely accepted as being the best such scheme available.

Why you should choose a salary sacrifice car scheme through Pink Salary Exchange

If you have opted for a car leasing agreement because it is the best salary sacrifice scheme available, then there are several more reasons why you will benefit if you sign-up to a salary sacrifice car scheme with Pink Salary Exchange. Here’s how you can benefit:

  • Flexible: Our car leasing agreements are flexible, so you can choose a lease term that ranges from as short as six months, up to a 48-month leasing agreement. We find that everybody’s circumstances are different so we offer flexible agreements to give you the best chance of finding what suits you best.
  • Low-risk: We understand that people change jobs or lose their jobs, and they don’t want to carry the liability of a leasing deal when they leave. So we offer an early termination agreement whereby you are not obligated to continue with the lease if you leave the company, and hence there is no risk to you signing up to it.
  • One payment: Our car leasing deals are covered using one payment which includes all your motoring costs; leasing cost, service & maintenance and insurance. Your only other cost is charging your vehicle. There is also no deposit required for the Pink Salary Exchange leasing agreement.
  • Access to the best car leasing deals: Our relationships with expert car leasing partners means we are able to find you the best car leasing deals on the market, and on brand new vehicles.
  • Used-car leasing: We are the only salary sacrifice car scheme which also offers used electric vehicles, which is an option to make your motoring even cheaper.
  • 20 years’ experience: Our salary sacrifice car scheme has been designed by people with over 20 years’ experience in car leasing, insurance, taxation and finance models, meaning our product is the most robust, tried & tested and comprehensive package available.
  • HMRC-approved: The taxation benefits within our salary sacrifice car scheme have been approved by HMRC.
  • Ground-breaking product: All these factors combine to ensure a salary sacrifice car scheme through Pink Salary Exchange is truly the ‘next generation’ of affordable and ‘net zero’ motoring.

In addition to all these benefits for the employer, we are confident that the easy set-up costs and administration, coupled with the national insurance reductions, means that our salary sacrifice car scheme is cost neutral for the employer, while providing a raft of human resources benefits also.

What should I do next?

The Pink Salary Exchange salary sacrifice car scheme could not be simpler and access to it is fast and straightforward for both employers and employees.

  • An employer can apply online and can be quickly set-up via an online management portal, which also offers all the information support for employees.
  • An employee can then opt into the scheme and can agree with their employer the portion of salary to be sacrificed and the benefit they wish to choose.
  • The employee can then choose the vehicle they wish to drive and enjoy all the benefits already outlined in driving an electric vehicle and entering into an agreement with Pink Salary Exchange.

Click here to find out more and register today!

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