As a business owner, you’ll be fully aware of the benefits of a happy workforce. Staff who feel valued and financially secure often work harder, are more engaged, and take less time off sick.

You can foster a happy staff team partly through the financial package you offer. After salary, the workplace pension scheme you choose could be the next biggest staff benefit you provide.

If you don’t already offer salary sacrifice as part of your pension package, keep reading for five reasons why you should. Plus, why doing so could benefit not only your staff but your business too.

5 benefits of salary sacrifice to you and your employees

1. Salary sacrifice lowers the Income Tax and National Insurance your employees pay

Salary sacrifice (also called “salary exchange”) allows you to reduce – or sacrifice – a portion of your pay in exchange for a non-cash benefit. This can take numerous forms, including childcare vouchers or gym memberships, but is most commonly used to provide pension contributions.

Taking contributions from your salary reduces your pay by the contributed amount. You earn less but this reduces the Income Tax and National Insurance you pay.

The full sacrificed amount is paid into your pension by the business, helping you to save for retirement.

2. The drop in tax could offset the fall in salary and even mean you take home more, especially for high-earners

Salary sacrifice can be a huge benefit to all of your staff, whatever stage of their career and whatever salary they receive. It could, though, be especially useful for high earners.

Where National Insurance contributions (NICs) and Income Tax are high, the decreased tax bill resulting from a sizeable salary sacrifice – and into a tax-efficient pension – could offset the drop in pay.

By reducing a taxable salary with tax-relieved income, you and your higher-earning employees might even find that take-home pay rises.

3. As part of an attractive benefits package, salary sacrifice could improve staff retention and lure the best new talent

Work-life balance has always been important for UK employees. Arguably, this is even more apparent since the coronavirus pandemic. An increased focus on flexibility, mental health, and switching off at the end of the day means that staff benefits might be key to keeping and attracting the best employees.

Salary sacrifice could play an important role in the benefits package your business offers.

In return, valued and financially stable staff are more likely to contribute to the business, whether through feeling able to share their views, through lower staff absence, or even increased productivity.

An Oxford University study back in 2019 found that happy employers are 13% more productive.

4. Salary sacrifice’s National Insurance savings apply to employees and employers

Salary sacrifice lowers the gross wage bill you pay as an employer, which usually means a decrease in company NICs too.

Because NICs are based on staff earnings, the more you pay out in wages, the higher your NI bill will be. Encouraging as many staff as possible – and especially your higher earners – to opt for salary sacrifice will help you make the maximum savings.

5. You can channel National Insurance savings back into your business

What you do with your business’s NI savings is up to you, but one option would be to channel this money back into the company.

Whether you choose to buy new equipment, up your marketing budget, or recruit more widely for the best new talent, the savings from salary sacrifice could make a real difference to your business over the long term.

Potential downsides and other factors to consider

It’s important to note that there might be downsides to salary sacrifice, too, for some of your employees.

For example, a lower salary could affect your employees’ eligibility for means-tested benefits. Some state benefits, including the State Pension, are connected to salary. This could be an issue if salary sacrifice takes your employees below the threshold for NICs.

Likewise, as earnings are used to calculate mortgage affordability, a lower salary could affect a lender’s decision. That said, salary sacrifice is commonly acknowledged by lenders, and so it is increasingly unlikely that it will detrimentally affect borrowing decisions.

Honest and straightforward communication about the pros and cons of salary sacrifice will help your employees make the right decision for them.

Get in touch

If you’re a business owner considering offering salary sacrifice to your employees, get in touch to find out how we can help. Boolers’ expert financial advice can help with whatever questions you have so be sure to speak to us before you make any decisions.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances. Workplace pensions are regulated by The Pension Regulator.