Is now the time to embrace Salary Sacrifice?

With the recent announcement in the first Budget of the new Labour Government regarding an increase in Employer National Insurance Contributions from April 2025, we do think that now is the time for organisations to consider the advantages of offering salary sacrifice schemes.

The impending rise of 1.2% to 15% in Employer National Insurance contributions, coupled with a reduction in the income threshold for paying National Insurance from ￡9,100 to ￡5,000, could significantly impacts employer costs, not only with the higher rate but more income brought into the calculations. It could also mean that those on low contracts with low earnings were not previously caught - ￡9100 on the current National Living Wage of ￡11.44 would be around a 15 hour a week contract. Employees on smaller contracts would now be caught.

This shift presents an ideal opportunity to explore how salary sacrifice can mitigate costs and provide valuable benefits to employees.

What is Salary Sacrifice?

Salary sacrifice is an arrangement where an employee agrees to give up a portion of their salary in exchange for non-cash benefits. This can include contributions to pensions, company cars, and cycle-to-work schemes. The key advantage of salary sacrifice is that it reduces the employee's gross salary, which in turn lowers their National Insurance and tax liabilities, and also (crucially for this change) the National Insurance liability of the employer. This makes it financially beneficial for both parties. PS Salary Exchange is simply another term for Salary Sacrifice, you may see that used.

So which benefits would Salary Sacrifice commonly be used for?

1. Pension Contributions: Employees can sacrifice part of their salary to enhance their pension contributions. This not only boosts their retirement savings but may also lead to tax savings.
2. Company Cars: Many companies offer salary sacrifice schemes for vehicles. Employees can opt for a new car, often with lower tax implications compared to owning a vehicle outright, especially with electric vehicle ownership on the rise. ?The Government have made at least a short term commitment to EV ownership with not increasing company car tax.
3. Cycle-to-Work Schemes: This initiative encourages greener commuting options by allowing employees to lease bicycles tax-efficiently. This benefit supports both employee health and the company’s sustainability goals.
4. Other salary sacrifice benefits: Alternative salary sacrifice benefits can also include health and wellness benefits such as memberships for gyms, season ticket loans for travel and training and development funding, and holiday purchase.

Before we go any further, let’s clarify how Salary Sacrifice works

When an employee participates in a salary sacrifice scheme, their gross salary is reduced, and the sacrificed amount is redirected towards the chosen benefit. For example, if an employee earns ￡40,000 and decides to sacrifice ￡5,000 for a pension contribution, their taxable (and NIable) income would reduce to ￡35,000. This reduction can lead to significant tax and National Insurance savings for both the employee and employer.

So what is in it for Employees and Employers

For Employees:

• Financial Savings: By reducing their gross salary, employees pay less National Insurance and income tax.
• Enhanced Benefits: Employees often receive benefits that may not be affordable otherwise, such as higher pension contributions or access to company cars.
• Wellbeing and Engagement: Salary sacrifice schemes can enhance employee satisfaction by providing valuable perks, fostering a positive workplace culture and some benefits are directly about wellness/

For Employers:

• Cost Reduction: With the impending increase in National Insurance contributions, employers can potentially save on their payroll taxes (National Insurance) by facilitating salary sacrifice schemes.
• Attracting Talent: Offering salary sacrifice benefits can make a company more attractive to prospective employees, aiding in recruitment and retention efforts.
• Improved Employee Engagement: Providing valuable benefits increases overall employee morale and engagement, leading to higher productivity levels.

But, of course, there are also risks and other points to take into consideration

While Salary Sacrifice presents numerous benefits, it is crucial to navigate the potential risks carefully. One significant area of concern is the interaction between salary sacrifice and the National Minimum Wage (NMW). As NMW rates rise steeply—the National Living Wage will increase to ￡12.21 per hour in April 2025—it is essential for employers to ensure that their employees’ post-sacrifice pay remains compliant, which can be every pay period dependent on worker type.

Compliance with National Minimum Wage

Under the NMW regulations, it is imperative that salary sacrifice does not reduce an employee’s earnings below the NMW threshold after the sacrifice has been applied. This can create a risk if an employee’s gross salary is close to the NMW rate: sacrificing a portion of their salary may inadvertently push them below the legal minimum. Employers must carefully monitor pay arrangements to maintain compliance and protect both the organisation and its employees.

Other watch outs for NMW include ensuring that organisations are not simply multiplying by 52 weeks as the foundation of calculations to determine salary and understanding the implications of different work patterns. Pay rates based on full time workers can be a risk for people working fewer days, such as part time or compressed hours workers. Reward Heads have worked with various clients to ensure they remain compliant and limit any NMW breaches. By understanding the watch-outs and risks, organisations can ensure they remain compliant. This could become an increased issue with more enforcement actions announced by the Government. We also have a module helping employers through NMW compliance so do reach out or look on our coaching page for more information on that - Coaching Courses in Reward

NMW Increases from April 2025:

• National Living Wage (21 and over): ￡12.21 (up by ￡0.77, 6.7%)
• 18–20-Year-Old Rate: ￡10.00 (up by ￡1.40, 16.3%)
• 16–17-Year-Old Rate: ￡7.55 (up by ￡1.15, 18.0%)
• Apprentice Rate: ￡7.55 (up by ￡1.15, 18.0%)

The importance of clear communication

Reward Heads have supported clients with the roll out of salary sacrifice benefits, and a key learning is how fundamental communication is to any salary sacrifice scheme. We recently worked with an education provider with many individuals close to National Living Wage and with low knowledge levels on pensions, including many with low levels of English. ?Effective communication was essential when rolling out the salary sacrifice pension scheme. It involved providing employees with comprehensive information about the benefits, mechanics, and potential implications of the scheme. This included detailed explanations, working examples, calculators, and resources such as FAQs and webinars. Clear communication helped their employees understand how salary sacrifice may impact and provided them with the knowledge of how it could benefit them. By ensuring employees are well-informed, organisations can create confidence in a scheme and enhance its overall effectiveness, enabling employees to make informed decisions that align with their financial goals.

As the landscape of employee benefits evolves, Salary Sacrifice schemes emerge as a powerful tool for enhancing financial wellbeing and engagement while simultaneously aiding employers in managing their costs. However, with the rising National Minimum Wage and changes in National Insurance contributions, it is crucial for both employers and employees to approach these schemes with caution. Ensuring compliance with minimum wage regulations while maximising the benefits of Salary Sacrifice will be key to navigating the upcoming changes effectively. By strategically implementing these schemes, organisations can provide valuable support to their workforce while safeguarding their financial interests in the face of legislative change

Please do reach out for support on salary sacrifice, National Minimum Wage or benefits and what any potential changes may mean for you and your employee - the Reward Heads team can support you. Please reach out to Victoria Milford , our CEO, at?[email protected] .

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