As UK businesses continue to face rising costs, salary sacrifice schemes are gaining renewed interest as a strategic tool for financial efficiency. By allowing employees to exchange part of their salary for non-cash benefits, employers can reduce National Insurance liabilities, enhance employee benefits, and improve retention – all while offering tax-efficient perks.
Understanding Salary Sacrifice & Its Tax Benefits
Salary sacrifice is an agreement between employer and employee in which the employee gives up a portion of their gross salary in return for a non-cash benefit – such as additional pension contributions, a cycle-to-work scheme, or an electric vehicle lease. Crucially, the sacrificed element of the employees salary is not subject to income tax or National Insurance (NI), making these arrangements tax-efficient for both parties.
For employees, this can mean a higher overall value from their remuneration package. For employers, it offers a legitimate way to reduce employer NI contributions and reinvest savings into other areas of the business. HMRC recognises salary sacrifice schemes, and certain benefits – like pensions, EV schemes, and workplace nursery places – retain full tax and NI advantages.
By integrating salary sacrifice into remuneration structures, businesses can align tax planning with employee wellbeing – enhancing the overall efficiency of their reward strategy.
Tackling Rising Employer National Insurance (ER NI) Costs
From April 2025, employer NI contributions are set to rise from 13.8% to 15%, increasing the pressure on payroll budgets. At the same time, the threshold for employer NI is reducing, meaning more of an employee’s salary is now liable for these contributions.
For businesses with a sizeable workforce, these changes could result in tens of thousands of pounds in additional annual costs. Implementing salary sacrifice schemes offers an immediate and HMRC-approved method to mitigate these increases.
When an employee sacrifices part of their salary for a qualifying benefit, the employer no longer pays NI on that portion. For example, if an employee sacrifices £2,000 towards their pension, the employer saves £300 under the new 15% rate. Multiplied across the workforce, these savings can significantly ease the burden of increased payroll taxes.
Enhancing Auto-Enrolment Pension Schemes
Pension contributions remain one of the most tax-efficient uses of salary sacrifice. Under a standard auto-enrolment arrangement, employees and employers contribute a set percentage of salary into a workplace pension. However, when pension contributions are made via salary sacrifice, the employee reduces their taxable income, and both parties save on NI.
This approach maximises take-home pay while boosting pension savings. For instance, an employee earning £40,000 who contributes 5% (£2,000) into their pension via salary sacrifice could save around £160 a year in NI. At the same time, the employer saves £300 on their contributions.
Many employers choose to share part of their NI savings by increasing their contributions or investing in financial education for staff. Not only does this improve pension outcomes for employees, but it also demonstrates a commitment to long-term staff wellbeing – a valuable asset in today’s competitive labour market.
Making Electric Vehicles (EVs) More Accessible for Employees
Electric vehicle (EV) salary sacrifice schemes have surged in popularity, thanks in part to the UK government’s low Benefit-in-Kind (BiK) tax rates for zero-emission vehicles. Currently, the BiK rate for electric company cars is just 3%, rising only gradually over the next few years to 5%. This makes EVs far more affordable when accessed through a salary sacrifice scheme compared to personal leasing.
Under such schemes, employees sacrifice a portion of their gross salary to lease an EV, covering costs such as insurance, servicing, and maintenance. They only pay tax on the small BiK value, while avoiding income tax and NI on the salary used to fund the lease.
For example, an employee choosing a £40,000 electric vehicle could end up saving over 30-60% compared to leasing privately. Through salary sacrifice, they might pay tax on a Benefit-in-Kind (BiK) value of just £800 (2% of the car’s list price), resulting in an annual tax cost of around £160 for a basic rate taxpayer. Meanwhile, the employer saves £600 in National Insurance – 15% of the £4,000 salary reduction (from £40,000 to £36,000) assuming monthly lease payments are £333.33 – while also strengthening their sustainability credentials.
Introducing an EV salary sacrifice scheme is a practical way for businesses to support environmental goals while offering a compelling benefit to employees – without increasing payroll costs.
Supporting Employee Benefits & Staff Retention
In a tight recruitment market, employee benefits play a key role in attracting and retaining talent. A well-structured benefits package, including salary sacrifice options, allows businesses to offer more value without significantly increasing costs.
From pension contributions to EV schemes, childcare support to additional annual leave, salary sacrifice enables employees to access meaningful benefits in a tax-efficient way. This improves financial wellbeing and provides a sense of personalisation in how employees engage with their compensation.
Employees who feel supported financially are more likely to stay, perform well, and speak positively about their employer. In fact, many employers report improved morale, reduced staff turnover, and stronger engagement after introducing flexible benefits through salary sacrifice.
By helping employees stretch their income further, businesses not only improve retention but also enhance their reputation as an employer of choice.
Final Thoughts
Salary sacrifice is more than just a tax planning tool – it’s a strategic approach to managing costs, strengthening employee benefits, and supporting long-term business resilience. As employer NI rates rise and financial pressures mount, integrating salary sacrifice schemes can help UK businesses future-proof their operations.
Whether enhancing pensions, introducing EV schemes, or reducing NI liabilities, salary sacrifice offers practical, compliant solutions that benefit both employers and employees. Now is the time for business owners to review their reward strategies and consider how these schemes can deliver real value.
If you’d like to explore how salary sacrifice can support your business objectives, our expert team at Ward Goodman is here to help. We provide tailored advice on remuneration planning, tax efficiency, and employee benefit strategies to suit your business goals. Get in touch today to find out more.
