What is Salary Sacrifice?

Salary sacrifice benefits make it possible for employees to spread the cost of payments over the course of multiple paychecks. This enables them to purchase things like home electronics, bikes, and family holidays that they might not have been able to afford within one large, lump sum. Another benefit of salary sacrifice for employees is that their payments are usually taken before taxes and are taken out of their paychecks, offering slight tax relief while they are paying back their purchase.

It is important for both employees and HR managers to understand how salary sacrifices work. For employees, this is beneficial as it can reduce tax liabilities and enhance net take-home pay through various pre-tax deductions, while also allowing them to purchase the things they need. 

For HR managers, comprehending these schemes helps with designing competitive benefit packages, which help to attract and retain top talent. Within this article, we will cover all the basics that employees and HR managers need to know about salary sacrifice benefits.

Salary Sacrifice Definition

According to the UK government’s guidance, the definition of salary sacrifice is “an agreement to reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit”.

How Does Salary Sacrifice Work?

Put simply, a salary sacrifice scheme takes three easy steps: making and accepting the agreement, taking a small salary reduction from the employee’s salary, and the employee receiving (and enjoying!) their purchase. 

Accept the Agreement

When an employee wants to purchase something through their company’s salary sacrifice benefit, they will need to first agree with their employer on their purchase and the amount of salary that they will give up in return for their purchase. It’s worth noting that the salary sacrifice benefit must not reduce an employee’s cash earnings below the National Minimum Wage (NMW) rates.

Take a Small Salary Reduction

Once an agreement has been reached and the employee has made their purchase, the amount is then taken directly from the employee’s monthly salary. These payments will be divided between multiple months, assisting employees with their financial wellbeing by allowing them to make purchases in smaller, more manageable chunks.

This is taken before National Insurance taxes are taken from employees’ paychecks, saving money for both employees and employers alike.

Enjoy the Purchase

After the agreement is reached between the employee and their employer, and the payments are set up to be taken from the employee’s salary, the employee is able to receive what they have purchased through their employer’s salary sacrifice scheme. 

Whether it’s a new bike, car, or family holiday, employees are now free to enjoy their organisation’s salary sacrifice benefit.

Advantages & Benefits of Salary Sacrifice

While salary sacrifice benefits might only seem beneficial for employees, these types of benefits are good for employers too. Below we’ll explain the advantages of salary sacrifice for both employees and employers:

Salary Sacrifice Benefits for Employees

Obviously the biggest salary sacrifice advantages for employees is the ability for them to acquire goods and services now and spread the cost over a period of time; however, another benefit is that salary sacrifices are taken before tax. This means that (if an employee was already planning to make a purchase) salary sacrifice tax relief will, at face value, discount whatever it is that they are purchasing. 

Additionally, while salary sacrifice does reduce employees’ paychecks, the tax savings might mean that their actual take-home pay is not that different than before they opted to use their salary sacrifice benefit. For example, if an employee’s salary sits just above a tax threshold, they may find that it won’t decrease much after taking a salary sacrifice.

Benefits of Salary Sacrifice for Employers

Similarly, employers who offer salary sacrifice benefits also save on tax costs, as they don’t need to contribute employer National Insurance contributions on the portion of sacrificed salary. 

Additionally, salary sacrifice benefits have the potential to greatly increase employee satisfaction, leading to increased productivity, a positive workplace culture, and improving an organisation’s employee recruitment and retention.

Considerations of Salary Sacrifice 

While there are many advantages to salary sacrifice benefits, there are also some disadvantages that employers and employees need to be aware of. 

Considerations for Employees

The most obvious disadvantage for employees of salary sacrifice benefits is that it reduces their monthly salary. While salary sacrifices can be a cost effective way to make a purchase, it is important that employees consider both salary sacrifice tax relief and the reduction that will be made in their monthly take home pay. 

While an employee cannot make a salary sacrifice purchase that lowers their pay below the National Living Wage, there might be other considerations to think about, e.g. being able to pay rent, afford food, or even just be able to go out and enjoy time with their friends or family.

Salary sacrifice doesn’t directly affect employees’ credit scores, but the reduction can make existing debts seem more burdensome to lenders, potentially indirectly affecting your credit profile or the maximum mortgage amount that you can qualify for.

Finally—though salary sacrifice payments are taken before National Insurance payments are taken out of an employee's paycheck—larger benefits like cars, accommodations, and loans can be subject to a benefit in kind tax, which employers take from employee wages through Pay As You Earn (PAYE) tax payments.

Considerations for Employers

Unfortunately, salary sacrifice benefits can also be time-intensive for an organisation, with the added HR demands of amending employee contracts. For companies where staff turnover is quite high, this can become an even greater issue.

Salary sacrifice benefits involve companies making a large purchase upfront, with employees then paying them back over a set amount monthly paychecks. This can then lead to complications if an employee leaves, or is terminated from, their current company during the duration of their salary sacrifice contract. 

Typically, the remaining balance would then be taken from the employee’s final paycheck, but if the amount they owe surpasses their final paycheck this can leave that financial burden on the organisation that originally made the purchase for their employee. 

However, with Vivup’s Lifestyle Protection plan, this concern can be avoided if companies offer their employees salary sacrifice benefits. For a small percentage of any order value, Vivup will reimburse employers for the difference between what can be reclaimed from the final salary of any employee who leaves and their outstanding debt.

Common Questions

At Vivup, we often find that certain questions get asked more frequently than others about salary sacrifice employee benefits. Here are the answers to the most common questions we see:

Does Salary Sacrifice Reduce Taxable Income?

As mentioned above, salary sacrifice and tax go hand-in-hand. As money for salary sacrifice purchases is taken out of employee salaries before income tax, their taxable income is reduced. This means that employees will save some money on purchases that they were already planning to make. With certain purchases, though, benefit in kind tax might still be taken from paychecks, so it’s important for employees to understand this ahead of time before they make their final decisions on their salary sacrifice purchase.

How Much Salary Can Employees Sacrifice?

Vivup doesn’t have an explicit limit on how much of their salary employees can sacrifice; however, they are not allowed to reduce their paycheck below the UK’s National Living Wage, which is currently £11.44 an hour for adults above the age of 21.

Does Salary Sacrifice Show Up on a Payslip?

Yes, salary sacrifices should appear on a payslip, with the sacrificed amount showing up as a deduction made before an employee’s tax and National Insurance are applied.

Do Salary Sacrifice Benefits Need a Credit Check?

No, credit checks are not usually required for salary sacrifice benefits.

Salary Sacrifice Examples

Common salary sacrifice benefits include Cycle to Work, Car Lease, and Home and Electronics benefits. At Vivup, we house these salary sacrifice benefits, along with other salary sacrifice benefits, in one convenient place—our employee benefits platform. 

Childcare

A salary sacrifice childcare benefit allows employees to ease the financial strains of childcare, helping staff with their work-life balance and feel more engaged in the workplace. 

At Vivup, our Family Pay benefit enables employees to salary sacrifice their childcare costs and make savings on National Insurance and pension contributions, helping to make the burden of childcare more manageable.

Cycle to Work

Perhaps the most common salary sacrifice benefit, Cycle to Work helps employees to purchase the bikes and equipment needed to start cycling to work for their commute. By offering a Cycle to Work benefit to employees, companies can help strengthen their green initiatives and offer up a healthier, more affordable commuting option to their people.

Car Lease 

A salary sacrifice car lease lets employees lease a brand-new, fully maintained, and insured car for a manageable fixed monthly amount. Our Car Lease benefit doesn’t require any deposits or credit checks, and allows employees to save on an inclusive driving package combining tax efficiencies with manufacturer discounts offered through our scheme.

Home Technology

Home technology benefits—like our Home and Electronics benefit—help employees to budget for their household essentials, appliance breakdowns, or even just products that have caught their eye like video game consoles or new televisions. 

While we encourage employees to shop wisely for products and not to reduce their salary to an extent that could be detrimental to them, our Home and Electronics salary sacrifice benefit enables them to spread the cost on thousands of items without needing a credit check, or having to use a loan or credit card for their purchases.

Boost Your Salary Sacrifice Offering With Vivup

Providing salary sacrifice schemes is a great way for companies to boost their benefits offering while also supporting employee financial wellbeing. By offering these more manageable ways for employees to make their large purchases, companies help their employees to feel valued and appreciated in the workplace.

As employee benefits experts in both the Private Sector and Public Sector, Vivup’s platform makes it simpler for both employers and employees, housing all of the salary sacrifice benefits for companies in one central place. 

Explore all the benefits that we have on offer, or book a demo with us today!

Terms and Conditions

Family Pay: For nursery places, Family Pay can be used to cover the cost of 80% of the total cost of the child care. Employees / Parents must have a direct relationship with their childcare provider.

Cycle to Work: Your organisation is a broker and not a lessor. SME HCI Ltd (trading as Vivup), 5 Margaret Road, Romford, RM2 5SH, is authorised and regulated by the Financial Conduct Authority (Ref 626422). UK Only, 18+, subject to status, terms apply.   

Car Lease: Permanent employees only, or if fixed term contract, this must be for longer than the Salary Sacrifice Agreement. This is a Hire agreement between the Employee and Tusker Ltd. All orders must be approved by the Employer. Order cancellation charges apply. 18+ only.

Home & Electronics: Goods will be ordered from the supplier when your order has been authorised by your employer and are subject to availability. If the goods are either not available or your employer is not able to authorise the order, Vivup will contact you to discuss alternatives.