How much can Salary Sacrifice mitigate our cost pressures?
ADD_AUTHOR_HEREThursday 21 August 2025
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Half of employers currently offer salary sacrifice schemes, but I wonder whether recent decisions on tax will fuel a rise in that figure, and push more people to use them. As inflation takes more people into higher tax brackets and the National Insurance hike hits company finances, they are worth a careful look.
An article in this week's Sunday Times by Ali Hussein highlighted the issue by spelling out how workers and businesses can face punitive 'cliff edge' pay rises, leaving less money in their pocket.
Example 1
A parent earning £59,999 can claim full child benefit (£25.60 a week for child 1 and £16.95 for child 2 totalling over £2,200 a year) but starts to lose that benefit once paid £60,000.
Example 2
A pay rise for a parent of two from £99,000 to £101,000 can cost them almost £12,000: £400 in lost personal income allowance, £4,000 in lost tax-free childcare, £3,285 lost in 15 childcare hours for a 2-year-old, and £3,444 lost for a nine-month-old, plus an extra £800 in income tax, all totalling £11,940.
So how can companies help avoid this?
Enabling workers at any level to put some of their gross salary towards salary sacrifice schemes can help them pay for valued products and services out of their pre-tax income, also cutting the employer's National Insurance liability. So, what are the steps?
- Find suitable schemes – the company signs up with suitable salary sacrifice scheme(s)
- Agreement – employees agree how much salary they will give up in return for benefits
- Salary reduction - that amount is taken from their gross salary (ie before tax and NI)
- Enjoying the Benefits – Employees start to access the benefits they have signed up for
Example 3
A worker earning £45,000 asks their employer to pay £2,500 of their salary into their pension through salary sacrifice. Their pay is reduced to £42,250 but their take-home pay stays the same. They pay £500 less in income tax and have £250 a year extra into their pension. NI reduces by £200 and overall, the company pays £375 less.
Popular schemes and benefits
- Pensions – investing in a pension brings a double tax incentive: companies and employees pay less income tax and NI, and pension growth is also free of tax.
- Childcare - workplace nursery schemes are increasingly popular, either through on-site facilities or appointed partner providers – both paid with pre-tax income.
- Cycle to work – employees can save 42% on the cost of a new bike and accessories which they pay for over the course of a year, while saving on tax.
- EV purchase – like a cycle to work scheme, employees can purchase an electric car through salary sacrifice, saving money on a big purchase and helping the environment.
- Health – gym membership and other health options can be paid for in the same way.
- Tech – given the cost of a new i-Phone, spreading mobile phone costs over a year can be popular. The same can also apply to laptops, TVs and other household appliances.
As well as saving money, these schemes can have multiple positive outcomes. Pension contributions and company-backed childcare can give employees a new peace of mind. Cycle to work and health-based schemes can obviously help improve health and fitness but can also promote new connections, community spirit and morale. After all, who doesn't want a more energetic and happier workforce?
Please get in touch with our team to discuss how benefits and salary sacrifice can form a part of your processes.