5 Salary Sacrifice Myths Holding Your Business Back

Salary sacrifice is an agreement in which an employee gives up part of their salary in exchange for a non-cash benefit, such as an employer pension contribution. Because this reduces the employee’s gross pay, they pay less Income Tax and National Insurance.

Despite its name having some negative connotations, salary sacrifice doesn’t leave employees worse off. It lets them either increase their overall pension contributions at no extra cost or maintain their pension contributions while boosting their take-home pay through NIC savings.

Salary exchange is another common term for the same arrangement because the employee exchanges part of their salary for an employer pension contribution.

In this blog, I’ll address five common salary sacrifice myths and explain what each one means for your employees, payroll and pension arrangements.

“I’m Losing My Salary”

Not quite. Your contractual salary goes down, but that money doesn't disappear; it goes into your pension instead. In effect, you exchange part of your salary for an employer pension contribution.

For example, say you earn £30,000 and pay 5% (£1,500) into your pension:

• Without salary sacrifice: you're paid £30,000 and pay National Insurance on all of it. Your £1,500 pension contribution then comes out of your pay.‍‍
• With salary sacrifice: your salary becomes £28,500, and your employer pays the £1,500 into your pension for you.

Either way, £1,500 goes into your pension, and your employer's own contribution stays the same. However, you no longer pay National Insurance on the £1,500 you've exchanged.

So your payslip shows a lower salary, but your take-home pay goes up slightly, and your pension contributions stay the same.

“It’ll Hurt my Mortgage”

In the past, taking part in salary sacrifice could reduce the amount an employee was able to borrow because lenders assessed affordability using the lower, post-sacrifice salary.

Nowadays, mortgage lenders are familiar with salary sacrifice arrangements and may consider the pre-sacrifice salary when assessing affordability.

An employee may be able to support their application with a letter from their employer or pension provider confirming their pre-sacrifice salary. The lender can then decide whether to use that figure when assessing affordability.

“It’s only for big companies”

Salary sacrifice isn’t exclusively a big company benefit.

Smaller businesses often assume it's too complex or only suited to large employers. However, recent increases in Employer National Insurance have made the potential savings more valuable for smaller teams. Even a company with fewer than 10 employees could save £1,000-£1,500 a year on the National Insurance it pays to HMRC, keeping more cash in the business.

“It’s locked in forever”

Salary sacrifice isn't permanent, but it isn't something employees can switch on and off whenever they choose either.

As it involves a genuine change to an employee's contract, HMRC expects the arrangement to stay in place for a set period. Changes are usually made at agreed points, such as once a year, or following a significant life event, such as marriage, divorce or pregnancy.

This works in everyone's favour. Employees know where they stand, payroll stays simple, and the arrangement keeps its tax and National Insurance benefits.

“It’s too complicated to set up”

For many SMEs, implementing salary sacrifice is simple.

The practical steps are:

Decide whether salary sacrifice is appropriate for the business and employees

1. Decide whether salary sacrifice is appropriate for the business and employees
2. Agree the arrangement with employees
3. Make the necessary contractial change
4. Update payroll so the sacrifice is reflected correctly
5. Ensure pension contributions are processed correctly.

A specialist provider can make the process easier. Gravitate, in partnership with Penfold, can provide the appropriate wording and support to reduce the administrative burden on both you and your employees when setting this up.

Claim your pension health check today

Despite the negative connotations of its name, salary sacrifice can benefit both employees and employers through boosted pension contributions and National Insurance savings.

However, this doesn’t mean it’s automatically right for every business. The arrangement needs to be structured correctly and considered alongside factors such as employees’ circumstances, contractual pay and pension arrangements.

We work with Penfold to offer clients a “free pension health check”, where we review your pension scheme, what you’ve got at the moment, the contributions you’re paying in, and compare it with Penfold. They will then look into salary sacrifice and calculate how much you can actually save.

Could your business save money through salary sacrifice? Get in touch today to claim your free pension health check.