What is salary sacrifice?

What does salary sacrifice mean?

As it says on the tin, when you join a salary sacrifice scheme, you allow your employees to sacrifice part of their monthly salary to pay for a product or service, commonly via a Cycle to Work, Electric Car, Refurbished Tech, or Annual Leave Purchase Scheme.

Does salary sacrifice reduce taxable income?

Yes. Salary sacrifice schemes reduce your taxable income.

With a salary sacrifice scheme, employers take the monthly repayment amount from an employee’s salary at the Gross level. That’s before Payroll processes the tax and NIC calculations.

Reducing the Gross pay amount lowers the tax and NIC contributions the employee and employer must make.

How does salary sacrifice differ from salary deduct?

With a salary sacrifice scheme, employers deduct the repayment from an employee’s monthly salary, so the employee is essentially sacrificing part of their salary, therefore paying less tax.

With a salary deduct scheme, HR processes payroll as usual, calculating tax and NIC contributions against the contracted pay. Whatever amount an employee is scheduled to repay as part of their salary deduct scheme is removed from the NET pay.

The amount an employee takes home each month will be reduced until the repayment schedule is complete, but there’s no reduction in tax or NIC contributions.

What are the benefits of a salary deduct scheme?

We understand why employers and employees ask us about the benefits of a salary deduct scheme. If there are no tax and NIC savings, then surely an employee just receives less money?

In essence, yes, but the bigger picture is that a salary deduct scheme helps employees spread the cost of the expensive items they want and need without using a credit card or going into debt.

SmartPay, our tech and lifestyle salary deduct scheme, is a fantastic example. We partner with the most extensive range of retailers in the tech deduct market, including Currys, Decathlon, Argos, Ikea, B&Q, John Lewis, and Wickes.

We’ve seen our client’s employees use SmartPay to purchase beds for their children, a new washing machine when their old one broke, speed up a redecoration project, and more!

SmartPay can help employees out of tricky situations when essential items need replacing or if they wish to spread the cost of the things that bring them joy. There may not be the same tax and NIC savings as with a salary sacrifice scheme, but SmartPay gives employees a smarter way to pay, preventing them from falling into debt or a negative credit cycle.

From an HR perspective, a salary deduct scheme requires less admin because there’s no need to recalculate the gross pay and tax contributions. 

Less admin = a time and cost-effective way to support employee wellbeing.

Discover more about SmartPay here: SmartPay… the cost-neutral employee benefit you need in 2024.

Where does the Annual Leave Purchase Scheme fit?

Our Annual Leave Purchase scheme allows employees to purchase extra holiday entitlement. Employers reclaim pay attributed to these days via the salary sacrifice arrangement, reducing the business’s payroll bill and National Insurance Contributions.

Read more on how our Annual Leave Purchase Scheme can help employees bring more balance to their lives.

Is salary sacrifice worth it?

If your employees can afford the monthly deductions, which you can explore at the application stage, then yes! 

Take our Cycle to Work scheme as an example. Employees can save money and spread the cost of a new bike, making their commute cheaper and more environmentally friendly while helping them get physically healthier.

A salary sacrifice scheme benefits employers, too! Employers reduce their NIC and tax bill for every employee who enrols in a salary sacrifice scheme. 

A salary sacrifice scheme is a cost-neutral employee benefit that can be free to implement. Many businesses use the savings to fund other employee wellbeing initiatives, employee rewards and the implementation of additional employee benefits.

Make employee benefits cost-neutral with salary sacrifice.

What about when the price is higher… Are salary sacrifice car schemes worth it?

In our blog, Save Money & Energy with Green Cars… our electric car salary sacrifice scheme, we explore how a salary sacrifice car scheme can save your employees money in purchase and running costs.

Between May 2023 and May 2024, Brits purchased over 2 million cars via a car finance scheme (Statista). The Annual Percentage Rate (APR) - the additional cost per year of the loan - on such schemes ranges from 7 to 10%. Using this traditional method to purchase a new car can add thousands of pounds to the purchase price for the perk of spreading the payments over manageable monthly amounts.

A salary sacrifice car scheme, managed by an employer, allows employees to spread the cost via smaller monthly repayments without adding any interest. Better still, since it’s a salary sacrifice scheme, the repayment is calculated at the Gross level, reducing tax and NI Contributions.

The same concept applies to the employer as with the Cycle to Work scheme. The more employees purchasing an electric vehicle through a salary sacrifice car scheme, the more NIC and tax savings there are for the business!

How does a salary sacrifice car scheme work?

First, the business signs up to embed our Green Car salary sacrifice scheme into their employee benefit offering. Next, their workforce can browse over 18,000 electric vehicles. With such a vast range of cars available, there are options for every budget. Employees apply for their chosen vehicle through the scheme, agree on a repayment schedule, and once approved, the process of preparing their car begins. 

Still have questions about salary sacrifice schemes and how they can create a world of opportunities for your people and business? Browse our FAQs below or request a call from one of our experts.