Salary Sacrifice: How It Works for Employers and Employees

Benefits for employers

As an employer, you will gain numerous advantages by implementing salary sacrifice arrangements, such as reducing employer national insurance contributions, decreasing employer workplace pension contributions, enhancing employee retention, and positively influencing employee welfare.

However, it is important to consider whether the salary sacrifice scheme is exempt from benefit-in-kind (BIK) taxation.

Non-cash Benefits Reporting And Possible Tax Implications

Reporting to HMRC is not required for certain non-cash benefits, which are also eligible for tax exemption:

• Payments into pension schemes
• Employer-provided pensions advice
• Workplace nurseries
• Childcare vouchers and directly contracted employer-provided childcare
• Bicycles and cycling safety equipment

Once non-cash benefits are not exempted, they must be reported to HMRC through P11D forms. Employers are required to pay Class A1 National Insurance contributions, and employees will pay personal tax on the benefit value. For instance, the benefit value of using a company car for personal purposes.

Some Examples

Childcare Salary Sacrifice: Childcare vouchers are a non-cash benefit that can be utilised as a salary sacrifice to save on tax and National Insurance contributions. There is a limit of up to £55 per week that is exempt from both NIC and tax.

For example, if an employee’s salary is £500 per week and £50 of this amount is allocated to salary sacrifice, the remaining £450 will be subject to tax and NIC. However, if £100 is allocated for childcare vouchers, then £445 is subject to NIC and tax. The excess amount of £45 in childcare vouchers should be reported via P11D, with a maximum of £55 being tax-free as a childcare voucher.

Pension Salary Sacrifice: You can contribute up to £60,000 annually for tax benefits and retirement savings. For example, if an employee’s gross annual salary is £50,000 and they sacrifice £10,000 for pension contributions, taxes and national insurance will be calculated on £40,000 instead of £50,000. Thus, the £10,000 is tax-free.