Nobody wants to take a pay cut, so convincing employees to sacrifice a portion of their income on a monthly basis can be challenging. That said, when it's made clear to individuals that salary sacrifice can open up a raft of benefits to them beyond the financial, then these conversations can be more straightforward.
What is salary sacrifice?
Salary sacrifice, also known as 'salary exchange', applies to employees who agree to forego a percentage of their salary to qualify for a range of other benefits provided by their employer. It is based on the premise that staff give up a portion of their monthly income in return for a range of non-cash benefits that are arranged and administered by the business.
Examples of salary sacrifice benefits include:
- Access to a company car scheme
- Childcare vouchers
- Additional employer pension contributions
- Access to parking facilities
- Cut-price gym membership
- Extra holiday days
- Cycle to work schemes
Each of these initiatives will have a monetary value attached to them, with employees able to choose those that are most attractive to them and then pay the requisite amount out of their salary to qualify.
What are the benefits for employees?
For employees, foregoing part of their monthly income to qualify for a range of employer benefits can be a good way to afford luxuries they might not otherwise have access to. At the same time, it has the added benefit of reducing the amount of tax they are liable to pay on their salaried earnings.
As salary deductions are carried out before tax, this provides savings for both the employer and employee alike. Tax is paid on the smaller amount after any deductions have been made and can add up to a significant overall saving during the course of a year.
Delivering services that go above and beyond the regular offerings can also be a great way to make the lives of employees easier. Childcare costs and arranging childcare in particular can be a significant source of stress for many parents, so offering vouchers or even a specific childcare service could be greatly appreciated.
At the same time, supporting staff to be more flexible in the way they manage their work-life balance can also be greatly beneficial. The ability to purchase extra days of annual leave, to have a company car or to cycle to work can all be fantastic ways to boost employee wellbeing.
What it means for your business?
For companies, salary sacrifice can be a means to increase employee engagement. Indeed, these schemes can help to boost morale by providing holistic support to staff that takes into account their overall physical and mental wellbeing, not just their finances.
Meanwhile, the fact that each individual who signs up for salary sacrifice will be effectively lowering their monthly wage means the employer’s National Insurance contributions are lower. Across the whole workforce, these savings can be significant for the business.
Finally, one thing that any company should remember when planning a salary sacrifice offering is the additional work that will be required to manage and keep track of it. Managing the back end, enrolling staff, dealing with employee questions and ensuring salary changes are processed correctly can be a time-consuming process, so this is something to be aware of.
As we've shown, salary sacrifice can be highly beneficial for both the employer and the employee. It's therefore a great way for businesses to make savings while boosting overall employee engagement and morale. If it's something your organization would be interested in offering, the drawbacks of setup and management of such schemes are often easily outweighed by the benefits they provide.