Financial pressures on both individuals and organisations mean employers are looking for ways to deliver more for less. Offering benefits through salary sacrifice is a cost-effective option, with April’s national insurance increase adding a further incentive.
Salary sacrifice took a bit of a battering back in 2017 when HMRC removed the tax and employer national insurance advantages from all but a handful of arrangements, including pensions, cycle to work and ultra-low emission cars. But Jeff Fox, head of strategic benefits consulting at Aon, says the savings employees can make on national insurance means it’s still an attractive way to offer benefits.
“The wings were clipped back in 2017 but we’re seeing something of a resurgence,” he says. “Employers can’t necessarily offer pay rises but, by offering salary sacrifice, an employee on average salary can save a considerable amount.”
As an example, sacrificing £100 of salary a month for a medical insurance scheme will save an employee paying national insurance on this part of their income. At 13.25 per cent, which represents a saving of £159 a year.
Matthew Gregson, executive director, UK Corporate at Howden, has also seen more interest in salary sacrifice, especially from smaller employers. “Most of the large employers already operate salary sacrifice schemes but we saw a lot of small- to medium-sized clients introduce schemes earlier this year. It’s a challenging time, for both employers and their workforces, and the additional saving employees can make on national insurance makes salary sacrifice more compelling,” he explains.
Additionally, where an organisation sets up a scheme for one of the benefits that still attract the full tax breaks, it will also secure savings on employer national insurance. On a salary sacrifice of £100 a month, this gives the employer a saving of £180.60 a year.
Employers can choose what they do with this saving, as Graeme Howell, senior employee benefits consultant at Mattioli Woods, explains: “Some pass it on to the employee, others retain all or some of it, in some cases using it to fund other benefits for staff. I’ve seen employers use it to fund a cash plan for employees and one organisation, a smaller firm that kept seeing its staff leave for the larger competitors, used the savings to create an incentive scheme to encourage retention.”
When it comes to how salary sacrifice is being used, unsurprisingly, the benefits that still enjoy tax breaks remain the most popular. Tom Conner, director at Drewberry, says that pension contributions remain the most significant area for salary sacrifice. “It has national insurance benefits for both the employee and the employer and it’s very common for higher earners to be sacrificing significant amounts of salary into their pensions in the run up to retirement,” he says.
He adds that while pension salary sacrifice is very well known among larger employers, there are opportunities among smaller companies to implement schemes. “We still come across many SMEs that weren’t aware of it or haven’t had the time or knowledge to implement it,” he explains.
Another benefit that enjoys all the tax breaks is the cycle to work scheme. Although home and hybrid working mean fewer employees are using these bikes to commute, this benefit remains standard. “The removal of the limits means that employees can select more expensive bikes, including electric ones, now,” says Fox. “It’s very popular.”
These schemes are based around a hire agreement, with the employee paying a twelfth of the bike’s value each month for a year and then having an option to buy it outright at a discounted rate at the end. The value of the bike was often capped at £1,000 to prevent employers having to get a consumer credit licence but, in June 2019, the Financial Conduct Authority announced that third party providers could run the schemes. This effectively removed the cap and put electric bikes into the tax-efficient reach of employees.
Pensions may dominate but another winner on the popularity front is electric cars. Conner says it’s very popular with his clients and is probably the fastest growing area within salary sacrifice. “The employee sacrifices salary in exchange for lease payments on an electric car, with both income tax and national insurance savings,” he explains.
Employee appetite for these vehicles goes beyond these savings too. As fuel prices have rocketed, electric vehicles offer a cost-effective and environmentally-friendly means of transport.
Offering electric vehicles through salary sacrifice is also a winner with employers, as Howell explains: “Alongside the financial benefits, it can help an organisation meet its ESG and sustainability objectives. We’re having lots more conversations with clients about offering electric vehicles through salary sacrifice.”
Although they may be a good move all round, it’s not an entirely smooth ride. Iain Laws, CEO of Towergate Health & Protection, explains: “One of the challenges is the waiting times for cars. There’s so much demand, it can take up to a year to get a vehicle.”
Supply issues may be putting the brakes on some electric car schemes but there are further uncertainties that may hamper growth of salary sacrifice. Laws says the cost of living crisis is making employees much more cautious about spending money. “Employees can benefit from the additional saving on national insurance for any existing benefit spend but we’re seeing fewer voluntary contributions due to all the uncertainty,” he explains.
Additional uncertainty comes in the shape of the next prime minister. If Liz Truss wins the leadership contest, she has vowed to reverse this April’s national insurance increase within weeks. This would make salary sacrifice less attractive but Howell says the national insurance saving is still worth having. “Reversing the increase only takes it down from 13.25 per cent, and 3.25 per cent for higher earners, to 12 per cent and 2 per cent. If a company has set up a scheme, it’s still a saving employees will appreciate,” he says.
It’s also worth noting that this year’s national insurance increase is only temporary, with the government replacing it with its new health and social care levy in April 2023. Although it will be charged at the same rate as the current uplift, as it is ringfenced to support UK health and social care bodies, it is unlikely that it will be offset through salary sacrifice.
And, while the government overhauled salary sacrifice in the last five years, Howell says there’s always a possibility that it might take more draconian measures. “Anything’s possible but while salary sacrifice is available, it’s definitely worth considering,” he adds.
For those employers who haven’t dabbled yet, setting up a salary sacrifice scheme is a relatively simple process. “Employers need to check with HMRC to be sure they’re ok with it,” explains Fox. “It’s takes a little more time if it’s being set up through a flex scheme but, even then, it’s not much work compared to the benefits it delivers.”
As it requires a variation of the terms and conditions of employment, this needs to be approved by employees, either individually or through a consultation with those affected. Once in place, employee communications are essential, as Adrian Firth, employee benefits consultant at Mattioli Woods, explains: “The way it’s communicated to employees makes a huge difference to take-up. Once it’s explained and employees see the savings they can make, you get the engagement. It’s a no-brainer.”