Salary sacrifice schemes 2024: everything you need to know Find out what a salary sacrifice scheme is, how they work, and what schemes are available so your business can design its own to attract and motivate staff. Written by Benjamin Salisbury Updated on 5 June 2024 Our experts We are a team of writers, experimenters and researchers providing you with the best advice with zero bias or partiality. Written and reviewed by: Benjamin Salisbury When deciding how to pay employees, it’s worth considering a salary sacrifice scheme which allows employees to exchange part of their salary for employer benefits that can lower income tax and National Insurance paymentsWith many different types of salary sacrifice schemes available, it can be hard to choose the right one to attract, retain and motivate staff.In this article, we’ll demystify this process, walking you through what a salary sacrifice scheme is, how they work, and what schemes are available. Plus. we’ll explore how a business can design its own and outline the tax implications. Below, you will find out: This article will cover: What is a salary sacrifice scheme? How do salary sacrifice schemes work? What different types of schemes are available? How to design a salary sacrifice scheme How do salary sacrifice schemes help employers attract, retain and motivate staff? What are the tax implications? The pros and cons of salary sacrifice What is a salary sacrifice scheme?A salary sacrifice scheme is a method for an employee to exchange part of their pre-tax salary for a non-cash benefit from their employer. Employers of any size, including startups, can operate a salary sacrifice scheme.It is a cost-effective and tax-efficient way for employees to save for a pension or pay for transport.Some benefits from salary sacrifice schemes are non-taxable. Currently, this is limited to additional private pension contributions, pension advice, employer-provided childcare and bicycles and equipment. Being part of a scheme means employees could pay less income tax and NI contributions. Employees can opt in and out of schemes and amend salary sacrifice amounts if they need to, but this must be agreed with the employer. Employers should inform employees about how being part of a scheme impacts sick pay and holiday pay.There are different salary sacrifice schemes available. An employer must opt into a scheme. Employers also benefit from lower employer’s NI contributions.The terms of an employee’s employment contract will be amended when they join a salary sacrifice scheme. How do salary sacrifice schemes work?Once an employer opts into and offers membership of a scheme, employees who join sign a salary sacrifice scheme contract with their employer, agreeing to sacrifice part of their salary in exchange for a benefit. Employees and employers must agree on the cash value of the benefit. The payroll administrator must amend the employee’s pre-tax salary. Employers must ensure the employee’s salary deduction does not take the employee’s pay rate below the national minimum wage.The agreed benefit amount is taken from an employee’s gross salary. Once an agreement is signed, the employee can receive the benefit.In April 2017, restrictions on which benefits can be provided through a salary sacrifice scheme were introduced. An example: An employee earns £36,000 a year with no benefits. They want to pay more into their workplace pension. The employer operates a salary sacrifice scheme with this as an option and the employee opts into the scheme.The employee agrees to ‘sacrifice’ 10% of their salary, i.e. £3,600 a year.This means the employee is paid £32,400 a year. The employer pays the difference, £3,600 into their workplace pension scheme as an additional contribution. The employee has sacrificed £3,600 of annual salary to receive the benefit of an increased £3,600 employer pension contribution, with no income tax and NI contributions liable. How much can employees save in a salary sacrifice scheme?There are no strict limits on salary amounts that can be exchanged for benefits as part of a salary sacrifice scheme. It depends on the scheme selected and the contractual agreement between employers and employees.Employees need to consider if they can afford to sacrifice part of their salary, and, if so, how much. They should assess what they need for essential outgoings, and pension savings. If applying for a mortgage, the provider will base lending decisions on the amount after salary sacrifice. A reduced salary can lower the amount of maternity pay an employee receives. What different types of schemes are available?There are different types of salary sacrifice schemes. Since April 2017, some employment benefits that were tax-free, no longer are. Existing tax-free benefits under the salary sacrifice scheme include:Cycle to Work Scheme – Employees select the bike they want and the employer buys it. It is leased back to the employee, who pays a monthly hire charge on the bike’s net cost using the salary sacrifice scheme. Employers don’t pay VAT on the bike and can pass that saving on to the employee. When the hire period ends, the employee can buy the bike from the employer at a ‘fair market value,’ set by HMRC.Childcare – Since 2018, when it was closed to new entrants, parents with preschool children can no longer use salary sacrifice for tax-free childcare vouchers. However, employers can still help employees via workplace nursery schemes. Employees can contribute fees to either an in-house nursery or an external provider. Benefits that are not tax-free include:Car leasing benefits – Employees can use salary sacrifice for a new lease car but will need to pay Benefit in Kind (BIK) tax at the end of the year, reported on the P11d form. If the car is not an ultra-low emission vehicle like an electric car, they could pay more BIK tax than they would save on income tax and National Insurance contributions. The employer does not own the car. The employee leases it from a hire company, who the car is returned to at the end of the agreed period. Techscheme – Technology and IT equipment can be purchased under a salary sacrifice scheme. Although the benefit is taxable, it can still help employees spread the cost of expensive smartphones or laptops over a 12-month period through salary deductions.Healthcare – Some employers offer health insurance, free gym membership or mental health services as a salary sacrifice option. This option can improve work/life balance and help attract and retain employees.Flexible benefit scheme – These are different to salary sacrifice schemes. They let employees buy a range of additional benefits from ones offered by their employer, which could be more suitable for their circumstances. How to design a salary sacrifice schemeA company should research different types of salary sacrifice schemes that are available. The decision on which scheme to select could be based on workforce demographics. If you employ many parents with young children, then a childcare scheme might be popular. If you employ older workers, one with healthcare benefits might be more suitable.The key considerations and steps an employer needs to take are:Consult with employees to see what demand there is for one.Decide which benefits will suit your workforce to use for a salary sacrifice scheme.Using employee feedback, decide on the goals of the scheme.Consider whether all employees are eligible.Decide on how employees opt in and out of a salary sacrifice scheme.Design the structure of the scheme and test that it works.Check what type of contractual amendments may be required.Check that your selected salary sacrifice scheme complies with HMRC criteria.Ensure the scheme complies with employment law. How do salary sacrifice schemes help employers attract, retain and motivate staff?In the current UK recruitment context, with skills shortages and high numbers of job vacancies, creating a candidate-driven market, employers need to offer attractive benefits to recruit the right candidates.Salary sacrifice schemes can help achieve this because they offer benefits that may be particularly useful for employees, depending on their circumstances. Benefits contribute to an attractive working environment, improve employee engagement and help build the ethos of a company. This can help motivate and retain existing employees. What are the tax implications?Some benefits offered by employers through salary sacrifice schemes mean the salary given up is not subject to income tax and NI. If benefits are taxable, like private health insurance, you may not save tax but you should pay cheaper corporate rates for the benefit than if you paid for it yourself. Taxable benefits are dealt with on form P11D, which employers submit to HMRC each year. The amount of tax an employee can save depends on their salary band and the tax bracket that applies to them. An example: An employee in the basic rate tax bracket who earns £40,000 a year, would pay 20% tax on their salary above the tax-free allowance of £12,570.So, £40,000 – £12,570 = £24, 430 @20% = £4,886 income tax due.If they choose to pay an extra £5,000 into their workplace pension using the salary sacrifice scheme, this amount is not subject to tax, so:-£24,430 – £5,000 = £19,930 is the new taxable amount @20% = £3,986 income tax due, saving £4,886 – £3,986 = £900 of tax. The pros and cons of salary sacrifice Pros for employers Employers can use salary sacrifice schemes to attract and retain key staff. Some benefits employees receive can be used for personal and business use, so employers don’t have to pay business mileage if an employee no longer uses their personal car for business travel. Employers also benefit from lower NI contributions. Salary sacrifice schemes help businesses improve employee wellbeing, engagement and satisfaction scores. Happier employees are likely to be more productive. Cons for employers Salary sacrifice schemes can be difficult to administer, particularly if the company has a high staff turnover. Employers can be left with early termination charges to pay on lease vehicles for instance. It can upset lower paid staff members who are not in a position to sacrifice any part of their salary and so miss out on the advantages. Pros for employees An opportunity to grow pension savings faster and benefit from extra pension tax relief. Save on income tax and NI payments. These are based on employee earnings and if their salary is reduced, tax and NI is applied on the lower amount. Receiving help on expensive essentials such as childcare can be a major financial benefit for recipients and reduce financial stress. It can spread the cost of expensive purchases like computers over a 12-month period. Health and lifestyle benefits for employees who receive Cycle to Work Scheme or healthcare benefits or gym membership. Opportunity to customise benefits to match employee’s lifestyle choices. Cons for employees Employees never receive the part of their salary they sacrifice. A lower salary can affect maternity/paternity entitlements. When applying for a mortgage or other credit, lenders will base affordability assessments on the amount after salary sacrifice. Salary sacrifice is less suitable for employees on lower incomes who have to use almost all of their salary for essential outgoings. ConclusionSalary sacrifice schemes can provide employees with useful tax-efficient benefits. By giving up a portion of their salary for a benefit of the same cash value, the employee can reduce their income tax and NI liabilities.The range of benefits available that are non-taxable under the salary sacrifice scheme has reduced since 2017, but the scheme can still offer employees a useful option.Employers can use the salary sacrifice scheme as a recruiting tool to attract candidates and to motivate and retain existing staff. Employers need to carefully assess the options to find a suitable scheme that benefits their employees. Benjamin Salisbury - business journalist Benjamin Salisbury is an experienced writer, editor and journalist who has worked for national newspapers, leading consumer websites like This Is Money and MoneySavingExpert.com, business analysts including Environment Analyst, AIM Group and written articles for professional bodies and financial companies. He covers news, personal finance, business, startups and property. Share this post facebook twitter linkedin Written by: Benjamin Salisbury