Salary sacrifice is more than a tax reduction scheme - it’s a way to financially support your employees through difficult times. 

It can be complex though - and it is important for employers to understand what is compliant and what could be bending the rules when it comes to the HMRC. 

We’ve broken down a few terms to help you understand salary sacrifice a little better, should you be considering it for your business and people. 

Salary sacrifice terminology

Understanding these commonly used terms will help you when having salary sacrifice conversations: 

1. Gross salary - this is an employees’ salary before tax and national insurance (NI) deductions. 

2. Net salary - this is an employees’ take home pay once all deductions have been made. 

3. Tax-free benefits - this refers to perks which you receive in return for a lower take home pay (without paying tax) 

4. National Insurance - Like tax, these are payments made to the government by employees and employers in order to qualify for benefits like a state pension. 

5. Employee salary sacrifice - a scheme which allows employees to sacrifice a portion of their gross salary in return for a benefit, like pension or workplace nursery. This helps reduce the NI contribution on the gross salary and allow for greater take home pay. 

6. Employer salary sacrifice - a scheme which allows employers to administer salary sacrifice for their employees. For every employee opted into salary sacrifice, an employer is eligible to receive a saving on their NI. 

7. Pension salary sacrifice - a pension arrangement put in place by your employer that allows contributions to be made via salary sacrifice, thereby increasing retirement savings and reducing tax paid monthly 

8. Childcare salary sacrifice - a workplace nursery arrangement put in place by your employer that allows nursery fees to be made via salary sacrifice, thereby increasing retirement savings and reducing tax paid monthly 

9. PAYE - Pay as you Earn is a system in the UK for collection income tax and NI from salary or wages. PAYE is affected with salary sacrifice as it adjusts earnings before deductions. 

10. Cost-neutral benefits - this is applicable for employers, where the cost of a salary sacrifice solution can be offset against the savings generated by each employee opt-in. 

11. Sacrifice agreement - this refers to the formal agreement between an employer and employee before any salary sacrifice scheme can be administered

12. National minimum wage - this refers to the least amount an employee can earn while employed in a standard full time role

Misconceptions

Avoid making mistakes by understanding these common misconceptions:

1. Salary and mortgages - opting in for a salary sacrifice deduction does not affect your current or potential mortgage applications, if the correct reporting is done.

2. Is it the same as taking a pay cut? - This is a usual question but the answer is simply, no. While your take home pay is less, employees will both save on the NI owed by them and also receive the benefit in question.  

3. Any amount can be salary sacrificed - this is untrue as there are legal requirements regarding minimum wage. As long as the amounts salary sacrificed don’t bring your net salary to below the minimum wage, where tax deductions differ, your scheme is compliant. 

Real-life example

Example one

1. Jane earns £40,000 per year. She sacrifice £2,000 into her pension and her taxable salary becomes £38,000. 

2. This means her income tax and NI contributions will be lower as she only being taxed on £38,000 instead of £40,000. 

3. She also benefits from increasing and growing her pension for retirement. 

Example two

1. The minimum wage in the UK for employees over 23 is £11.44 per hour (for a job of 37.5 hours per week).  This means the monthly NMW is £1,857 per month. 

2. If Jane earns £1,900 per month before deductions, and sacrifices £100 per month into her pension, her gross salary would be £11.08 per hour. 

3. This is below the NMW and is therefore non-compliant. 

Want to implement salary sacrifice? 

You need to enlist the service of an expert. Maji is a financial wellbeing provider who is accredited and able to set up salary sacrifice quickly and efficiently. 

Your HR team will reap the rewards of a digital tool where you can: 

1. Manage employee contributions seamlessly

2. Streamline and adjust pension contributions 

3. Provide auto-escalation tools for easier saving

4. Get real-time reports and data into opt in data

5. Offer dedicated employee support via a live chat function 

Want to get started? Book a call with Maji for a proposal.