We use cookies on this website to ensure the best user experience for yourself.
If you want to learn more about how cookies affect you, click here.


Pegasus Blog

A quick and easy guide to salary sacrifice for employers


July 16, 2014

As an employer, one of the taxable benefits you can offer your employees is salary sacrifice. It has become increasingly popular in recent years and can include pension contributions, childcare vouchers and cycle schemes. But, what exactly is salary sacrifice and what are the benefits for you and your employees?

What is salary sacrifice?

Salary sacrifice is an arrangement between an employer and employee to change the terms of an employment contract. Under a salary sacrifice agreement, your employee exchanges some of their cash earnings for non-cash benefits provided by you.Salary sacrifice arrangements can include pension contributions, childcare vouchers, cycle schemes, health care and subsistence allowances.Since the introduction of auto enrolment, many employers are planning to enrol employees into workplace pension schemes in combination with salary sacrifice arrangements.

Main benefits for employers

In many instances, salary sacrifice arrangements can be financially beneficial for both you and your employees.As you’re paying participating employees a lower salary, it means the National Insurance contributions will be lower for both parties. You may choose to pass these savings onto your employees or you might choose not to. Across a large workforce, this could result in substantial savings.Salary sacrifice will also add to the benefits package you’re offering employees which could make you more desirable to future job candidates and improve motivation among your existing workforce.

How does it work?

Let’s look at how a salary sacrifice pension scheme might work. Put simply, your employee might choose to sacrifice 5% of their salary. As an employer, you would then pay the equivalent 5% into their pension.It’s important to take into account that salary sacrifice might not be suitable for all employees. If salary sacrifice takes your employees’ weekly earnings below the lower earnings limit of £111 (as per the 2014/2015 tax year), then they may not be entitled to benefits including statutory sick pay and statutory maternity/paternity pay. Therefore, it might not be financially viable for employees on a lower salary to join a salary sacrifice scheme.

Setting up salary sacrifice

When implementing salary sacrifice it’s essential that you make changes to your employee terms and conditions. To meet HMRC guidelines, make sure you clearly explain that your employee will receive a lower salary as a result of the agreed sacrifice and detail the non-cash benefit they’ll be receiving. It’s important to communicate the changes and be sure your employees fully understand the salary sacrifice agreement, its advantages and disadvantages.You will also need to think about how you’re going to manage the salary sacrifice scheme in your payroll department. Does your payroll software support salary sacrifice contributions?

Salary sacrifice in Opera 3 Payroll at a glance

There is good news if you use Opera 3 Payroll, because it now fully caters for salary sacrifice as standard. It calculates percentage based pension contributions and includes them within associated pension files and reports. Key benefits of salary sacrifice in Opera 3 Payroll:

  • Handles both pension based and non-pension based salary sacrifices (childcare vouchers and cycle schemes)

  • Quick and simple to setup

  • For ease, a pension salary sacrifice can be based on a defined value or a percentage

  • Prints onto employee payslips

  • Pension salary sacrifice values are shown on the employee/history form

  • For pension salary sacrifice, the employer’s NI saving can be added to the pension contribution

To learn more about salary sacrifice and Opera 3 Payroll, contact us on 0800 919 704 .