By Cheryl Clements, head of business development, Tusker

Salary sacrifice remains a leading strategy to make the most out of your employee benefit budget. By using the HMRC-approved arrangement, your organisation and employees reap significant National Insurance (NIC) and tax rewards while enhancing financial wellbeing across your workforce. These savings maximise the value of your rewards package, leaving extra funds available for other benefit options.

With organisations increasingly focused on sustainable travel, pensions, and employee wellbeing - salary sacrifice is shaping up to be an even more powerful choice.

 Here’s all you need to know:

Identifying which benefits can be arranged through salary sacrifice

In recent years, the range of benefits offered through salary sacrifice has vastly expanded, providing more opportunities for employers to support workforce needs while reducing NIC costs. Popular options now include:

  • Electric vehicle (EV) schemes that make low-emission cars more affordable.
  • Nursery schemes to help parents manage childcare costs.
  • Cycle to Work schemes which promote healthier, greener commuting.
  • Grocery saving schemes, offering discounts on everyday supermarket shopping.
  • Tech schemes that alleviate the cost of laptops, tablets, and phones.
  • Pensions which continue to be the most common salary sacrifice option.

Many of these schemes are now combined with green policies, employee wellbeing strategy and financial education initiatives to enhance personalisation and overall benefit offerings.

Understanding how salary sacrifice works

Salary sacrifice works through employees agreeing to give up a portion of their salary in exchange for a non-cash benefit, resulting in their taxable earnings decreasing. This produces significant income tax savings for employees - and NIC savings for both employees and employers.

However, it is important to assess all types of salary sacrifice when considering new benefit options as their policies and saving abilities may differ. Here are some examples

Example - Cycle to Work Scheme

  1. An employee takes a £1,000 cycle-to-work voucher.
  2. A basic rate taxpayer, paying 20% income tax and 12% in NIC would normally pay £320 (32%) on this £1000, with a higher rate taxpayer paying 40% income tax and 2% NIC which ends up at £420 (42%).
  3. With salary sacrifice, the £1,000 is exchanged for the voucher and is no longer taxable. This means that instead of paying £320 or £420 in tax, these amounts are deducted from tax bills, saving employees a significant amount of money.
  4. Employers also benefit as they do not pay NIC on the amount sacrificed. At the current employer NIC rate of 15%, this means:
  • The employer saves £150 on every £1,000 sacrificed.
  • If 20 employees each take up the full £1,000 voucher, the organisation saves £3,000 over the year.

 Example - Cars and Ultra Low Emission Vehicles (ULEVs)

Salary sacrifice applies to cars in a similar way. The lower the car’s CO₂ emissions, the lower the tax for both employees and the organisation.

  • Pure electric cars with zero emissions are the most tax-efficient, followed by Ultra-Low Emission Vehicles (ULEVs).
  • From April 2025 the BIK rate applied to zero-emission cars is 3%, continuing to make them particularly advantageous for employees and employers compared to most benefits that are taxed at normal rates (20% onwards depending on income).
  • Rates increase gradually for ULEVs with the highest electric miles, and then every 5 g/km increase in emissions, up to a maximum of 37% for the highest-emitting cars.

Pensions work slightly differently with an option for employees to put the tax savings into their pension pot rather than take it as additional pay. However, the employer NIC savings of 15% remain the same.

Identifying costs and savings

 Before you implement salary sacrifice schemes, it’s important to identify costs in order to build a business case for your implementation, as well as have the best information to keep employees properly informed and educated on their decisions. This should include:

  • Surveying employees to measure interest in bikes, EVs, or pension boosting and making sure it’s in the best interests of your workforce to help[ with forecasting.
  • Evaluating NIC savings and assessing the best, worst, and most-likely scenarios based on tax bands to properly understand its impact on the organisation and its employees.
  • Look into set-up and admin costs by checking provider fees, payroll system changes and provider -support.
  • Work with providers that offer insurance, scheme protections, and compliance support to understand the best risk protection options.

To enhance your strategy, also make sure that you assess non-financial benefits when demonstrating to others why salary sacrifice is a critical benefit. For example, how it would strengthen CSR goals, provide critical support to employees during the cost-of-living crisis, and elevate your employer brand.

Managing lifestyle events and flexibility

It is essential to understand and inform employees of any policies surrounding salary-sacrifice before up-take. Critically, HMRC requires that employees commit to salary sacrifice arrangements for at least twelve months. However, they do allow what they refer to as certain ‘lifestyle events’ which means a contract can be terminated before twelve months. These include:

  • Marriage, divorce, or separation.
  • Birth or adoption of a child.
  • Death of a partner.
  • Significant changes to employment terms.

Additionally, to align with increasing demands for flexibility in the workplace, it is important to consider whether to position any new salary sacrifice schemes with annual flexible benefit windows. These are online portals designed for workers to personalise their benefits package, providing a smoother process where all employees can tailor their benefits to their age and circumstances - producing a more fulfilled, loyal and engaged workforce.

Communicating clearly - and employees

When launching a new salary sacrifice benefit, you should communicate clearly with employees so they understand how it works, financial savings they would receive, and any potential impacts (for example on statutory benefits like parental leave, life cover, or mortgage applications or what it would mean in regards to wanting to leave the company).

Effective communication is critical when introducing every benefit. Use a range of communications like FAQs and webinars to help all employees understand their personal savings and the impact of their decisions. The more confident employees feel, the greater the uptake is likely to be, with fewer queries and issues for HR teams to manage.

Concluding thoughts

With rising living costs and employees looking for better value from their benefit offerings, salary sacrifice is a proven option to help stretch budgets, support sustainability goals and improve your employee financial health.

Whether you’re introducing an EV scheme, expanding pensions, or giving people greener commuting options, salary sacrifice is a cost-effective strategy that benefits both employer and employee.

 

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