Salary Sacrifice: Is It Worth It for Your Business?

When it comes to structuring employee compensation, salary sacrifice can be a game-changer. It can offer tax savings, increase pension contributions, and even provide employees with valuable benefits like electric vehicles and childcare vouchers. But is it really as good as it sounds?

In this post, we'll break down:

✅ What salary sacrifice is

✅ How it impacts cash flow, tax, and profit & loss

✅ The key benefits and risks for business owners

✅ Why you need a proactive accountant to navigate the rules

What is Salary Sacrifice?

Salary sacrifice is an agreement between an employer and an employee where the employee gives up part of their salary in exchange for a non-cash benefit.

For example, instead of paying an employee £50,000, you might agree to pay them £45,000 plus a company car or additional pension contributions.

Since the sacrificed salary is not subject to National Insurance, employees pay less tax, and employers can reduce their National Insurance liabilities.

Sounds great, right? Well, it’s not quite that simple…

Why Salary Sacrifice Isn’t What It Used to Be

A decade ago, businesses could offer almost anything under salary sacrifice—laptops, holidays, even guitars! But in 2017, the government introduced optional remuneration rules that significantly limited the tax advantages.

Now, most salary sacrifice schemes no longer provide significant tax savings—except for a few key exceptions.

Where Salary Sacrifice Still Works

Despite the new restrictions, salary sacrifice is still a powerful tool when used correctly. The biggest areas where businesses can still benefit include:

Electric Vehicles (CO2 emissions under 75g/km only)

🚗 Employees pay much lower Benefit-in-Kind tax on electric cars

🚗 Employers still save on National Insurance

🚗 Typically the most tax-efficient way to lease an EV

⚠ But beware—electric vehicle tax benefits are set to change after 2025, meaning this loophole may soon close!

Pension Contributions

🏆 Employees save National Insurance and income tax

🏆 Employers save on National Insurance contributions

🏆 Can significantly boost retirement savings

This is one of the best uses of salary sacrifice today, especially for business owners looking to drive profit while supporting their employees’ financial future.

Pro Tip: A great employer will reinvest the savings into the pension pot instead of keeping them!

Cycle to Work Schemes

🚴 Employees can purchase bikes tax-free

🚴 Employers save National Insurance

🚴 A great incentive for health-conscious employees

⚠ VAT Warning: Cycle to Work schemes may be subject to VAT, so it’s critical to consult with an accountant before implementing one.

Childcare Vouchers

👶 If employees are still on the old childcare voucher scheme, salary sacrifice is still tax-efficient

👶 Employees can save up to £933 per year in tax

While the new government childcare scheme has largely replaced this, some businesses may still have employees benefiting from the older system.

The Risks & Hidden Costs of Salary Sacrifice

While salary sacrifice has clear benefits, there are serious considerations that business owners and employees need to be aware of:

🚨 Reduces gross salary – This can impact mortgage applications, maternity pay, and redundancy pay.

🚨 Compliance is key – If set up incorrectly, you could face tax penalties.

🚨 Future tax changes – The government is already looking at limiting some salary sacrifice benefits further.

If you’re thinking about implementing salary sacrifice, working with a proactive accountant or finance manager is essential to ensure compliance and maximise tax benefits.

How to Implement Salary Sacrifice the Right Way

If you’re a business owner considering salary sacrifice, follow these steps:

✔ Consult with an accountant – Ensure you fully understand the tax implications.

✔ Communicate with employees – Make sure they understand how it impacts their finances.

✔ Choose the right scheme – Focus on pensions and electric vehicles for the best savings.

✔ Stay compliant – Keep accurate records and review government guidance regularly.

Final Thoughts: Is Salary Sacrifice Right for Your Business?

Salary sacrifice isn’t the tax hack it used to be, but when applied correctly, it can still offer cash flow advantages and tax efficiencies—especially for pensions and electric vehicles.

If you want to explore whether salary sacrifice could work for your business, speak to an accountant or finance director to get the best advice tailored to your situation.

Need help making salary sacrifice work for your team? Get in touch with Profit Cash Growth today and let us help you navigate the best financial strategies for your business.