How “salary sacrifice” could help you attract top talent and cut business costs

As a business owner, offering a competitive salary, enjoyable office culture, and flexible working are all effective ways to attract and retain top talent. But did you know that, for many job hunters, a good benefits package is their number one priority when choosing a new role?

Indeed, People Management reports that 55% of younger workers say strong benefits are the most important thing when searching for a job.

One way to offer benefits to your team is through a “salary sacrifice” arrangement. This could allow your employees to pick and choose the benefits they really want and potentially increase their take-home pay – an attractive proposition for potential hires.

From your perspective, it could boost productivity and save on business costs, something every business owner strives for.

Read on to learn more about salary sacrifice.

Salary sacrifice lets your employees forfeit some of their salary in exchange for a non-cash benefit

Salary sacrifice is an arrangement you make with an employee where they agree to reduce their pre-tax salary in return for a non-cash benefit.

You could offer a range of benefits through a salary sacrifice scheme such as:

A company car
A cycle-to-work scheme
Childcare vouchers
Additional pension contributions.

Employees can opt in or out of any salary sacrifice benefits you offer, so they can choose the perks that match their lifestyle.

If a staff member opts into a salary sacrifice arrangement, you’ll normally have to update their contract to reflect the change.

Salary sacrifice could benefit your employee’s finances and more

Offering perks through salary sacrifice gives employees control over which workplace benefits they receive and could enable them to boost their take-home pay.

Employees could be better off

When an employee chooses to sacrifice a portion of their salary, it is deducted from their gross pay. In return, they could receive a non-cash benefit equal to the amount of pre-tax salary they’ve forfeited.

For example, if an employee receives £500 a week and sacrifices £100 of that salary in exchange for childcare vouchers, only £400 of their weekly income is subject to National Insurance (NI) and Income Tax.

They receive the full value of their sacrificed salary as a benefit, whereas if they’d received the £100 as income, they’d have lost a portion of it to tax and NI.

In fact, by reducing their salary, employees may end up with a higher take-home pay, especially if they are close to a tax threshold.

The Guardian provides a useful example of how this might work.

A worker earning £52,500 may have take-home pay of £39,167. If they used salary sacrifice to reduce their salary to £50,200 and instead contribute £2,300 into their pension, they would move down a tax bracket, and their take-home pay may rise to £39,664, making them £500 better off a year.

Employees can choose benefits that are valuable to them

Employees will benefit most from workplace perks that are relevant to them and their lives. Offering a salary sacrifice arrangement could allow your employees to select the benefits that are valuable to them.

This could provide your team with a “best of both worlds” scenario where they can choose between a higher salary, or sacrifice income for workplace perks that they truly value.

Offering salary sacrifice as a staff perk could have a range of benefits for you as an employer

As well as improving your team’s financial wellbeing, salary sacrifice could have direct benefits for you as a business owner.

You could pay less National Insurance as an employer

As an employer, you normally make National Insurance Contributions (NICs) on behalf of your employees. However, you don’t have to pay NI on any salary your staff members choose to sacrifice.

Employer NICs are usually up to 13.8% of your employees’ salaries, so your business could potentially save a lot in costs.

Royal London provides a useful example. If you had 100 employees on £30,000 a year, under a “relief at source” pension scheme with 5% employer contributions, you would pay £150,000 in employer pension contributions a year.

By shifting to a salary sacrifice scheme, you could save £20,700 a year on NICs.

So, salary sacrifice could cut NICs for both your business and your team. Many firms use any NI savings to increase the pension contributions they make on behalf of their staff, adding a further benefit to employees.

You could attract and keep more productive staff

As an employer, you want your staff to be happy and you also have to ensure your business grows and stays profitable. Fortunately, there’s a symbiotic relationship between these two goals.

You’ve read how salary sacrifice could make your staff better off and provide them with benefits they value. As a result, you may be able to attract and retain talented workers and foster a happy workplace.

A positive working environment could raise the output of your entire team. Indeed, research from the University of Oxford found that happy workers are 13% more productive.

There are some cons for your employees to be aware of

While there could be many upsides to implementing salary sacrifice in your business, there are some potential negatives to keep in mind.

Opting into a salary sacrifice scheme will lower an employee’s contracted salary, which may affect their ability to borrow money. For example, mortgages are normally based on a multiple of salary, so a smaller income may reduce an employee’s borrowing potential.

Additionally, some workplace and statutory benefits like maternity pay and sick pay are based on salary, so a lower income could mean staff receive less of these types of benefits.

It’s important to make your team members aware of these potential downsides before they opt into a salary sacrifice arrangement.

Get in touch

A financial planner can help you explore a range of ways to make your business an even better place to work so you can hire the best people and support their happiness and productivity.

To find out more, please email enquiries@clarionwealth.co.uk or call us on 01625 466360.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.