Wage sacrifice: The way it works for workers and their employers

Money remuneration is one approach to appeal to staff and reward them for his or her onerous work – nevertheless it’s not the one means.

A spread of non-cash advantages within the type of wage sacrifice schemes exist that you could make the most of as an ideal incentive to draw and retain staff.

On this article, we break down what your choices are, how they have an effect on tax calculations, and the benefits and downsides for each you and your staff in getting into into these preparations, so you possibly can really feel assured in your selections.

Right here’s what we cowl:

What’s wage sacrifice?

Also called wage trade, wage sacrifice an settlement between you and your worker to cut back their pre-tax annual wage in return for receiving a non-cash profit, i.e. items or a service.

Mostly employers supply childcare, healthcare, transport, and elevated pension contributions.

These advantages are voluntary and staff are capable of choose in and choose out of the schemes.

Most wage sacrifice schemes such because the Cycle to Work scheme should be supplied to all staff.

So that you’ll wish to arrange a strong HR course of to make sure contracts are up to date, and the proper info is supplied to payroll.

How does wage sacrifice work?

Earlier than you enter into an settlement, you’ll first have to agree on the money worth of the advantages to make sure the worker is pretty compensated for his or her lack of earnings.

The association should not cut back your worker’s money earnings under the Nationwide Minimal Wage (NMW) charges.

So you could put procedures in place to cap wage sacrifice deduction and guarantee NMW charges are maintained.

To provide an instance, let’s say your worker’s present contract offers for money remuneration of £40,000 a yr with no advantages.

You each agree that for the longer term, the worker shall be paid money remuneration of £35,000 a yr, and you’ll pay a further £5,000 to their office pension scheme.

The worker has sacrificed £5,000 of annual wage to obtain the advantage of an elevated £5,000 employer pension contribution.

What wage sacrifice schemes can be found?


Often called the Cycle to Work scheme, in essence, your worker hires a motorcycle for the interval of the settlement. The bike should be owned by you or a 3rd occasion.

To simplify the method, there are many scheme suppliers within the UK you possibly can register with, and the worker will deal instantly with them in selecting the bike they need.

There’s no restrict on the worth of the bike below the scheme, except you determine to cap it.

On the finish of the rent interval there are a number of choices for the worker:

  • Enter into a brand new settlement to rehire the bike
  • Purchase the bike from the scheme
  • Give the bike again.


Much like the bike scheme, staff can sacrifice a set quantity of their wage every month in trade for a brand-new lease automobile.

The set month-to-month quantity often consists of the important extras that include automobile possession akin to highway tax, insurance coverage, breakdown cowl, servicing and upkeep.

Your corporation doesn’t personal the automobile, the worker is just borrowing it from the lease firm.

The leasing firm stays the registered keeper of the lease automobile, and it’s returned on the finish of the time period.


For workers who participate within the office pension scheme, you could contribute a minimal of three% employer contribution, although you possibly can select to contribute extra.

One choice to extend contributions is thru a wage sacrifice pension scheme.

It implies that your employer contributions enhance, besides that they’re actually the worker’s contributions, as a result of their wage is proportionately lowered.

There isn’t a selected restrict to how a lot the worker can sacrifice.

However as we talked about earlier, your worker’s lowered wage has to stay above the nationwide minimal wage.

You additionally want to remember that every particular person can solely contribute a complete of £40,000 to all pension financial savings yearly (that is the case for the 2022/23 tax yr; it’s been frozen at this determine for a number of years).

This consists of employer contributions, so ensure that the upper contributions from their wage sacrifice doesn’t push them over this.

It’s additionally useful to examine the minimal and most contributions allowed by the pension supplier.

Childcare vouchers

Sadly, this scheme is closed to new candidates (they’ll now entry Tax-Free Childcare), however you possibly can proceed to run the scheme for workers who joined on or earlier than 4 October 2018.

Staff who’re a part of the scheme can sacrifice as much as £55 per week of their wage in return for vouchers of the identical worth for use with registered childcare suppliers.

What does wage sacrifice imply for tax and Nationwide Insurance coverage contributions?

As a result of wage sacrifices are deducted from pre-tax wage, this implies staff save earnings tax and Nationwide Insurance coverage on the sacrificed quantity.

Let’s say, for instance, they obtain £350 per week, and £50 of that wage is sacrificed for childcare vouchers of the identical worth. The result is just £300 is topic to tax and Nationwide Insurance coverage contributions.

Employer financial savings relate to employer Nationwide Insurance coverage charges.

Usually, employers contribute 15.05% to Nationwide Insurance coverage and might subsequently generate as much as 15.05% financial savings on any funds processed by way of wage sacrifice.

For instance, for each £1,000 spent on the Cycle to Work scheme, the typical employer will recoup £150.50.

You additionally want to contemplate that reporting necessities for non-cash advantages are totally different to these for money earnings.

Basically, advantages should be reported to HMRC on the finish of the tax yr utilizing the end-of-year bills and advantages on-line kind.

Benefits of wage sacrifice for employers and staff

As we talked about above, the widespread profit throughout schemes is that staff can make the most of the exemption from earnings tax and Nationwide Insurance coverage on the sacrificed quantity.

Wage sacrifice schemes additionally make high-priced objects akin to a automobile or bike extra reasonably priced by permitting your staff to unfold the price.

Paying for these things in month-to-month instalments that come straight out of their wage is way more manageable than paying one lump sum upfront.

They will additionally use these advantages for enterprise and private use.

This implies as an employer, you don’t have to pay enterprise mileage because the worker is not utilizing their private automobile for enterprise journey, in order that they received’t be claiming enterprise miles.

The identical advantages additionally reward employers as a result of the schemes assist to draw workers and enhance worker retention. As well as, employers save on tax prices as a result of there’s no employer Nationwide Insurance coverage contribution to pay on the portion of sacrificed wage.

Disadvantages of wage sacrifice for employers and staff

As wage sacrifice schemes basically cut back the worker’s wage, this might influence any credit score or mortgage purposes.

It additionally implies that work-related statutory funds (funds paid by the employer and primarily based on common earnings over a set interval, akin to statutory maternity pay and statutory sick pay) shall be affected too.

For a automobile leasing scheme, the worker might want to pay Profit in Type (BIK) tax on the finish of the yr.

If the leased automobile shouldn’t be an extremely low emission automobile like an electrical automobile, they may find yourself paying extra on BIK tax than they’d save on earnings tax and Nationwide Insurance coverage contributions.

For employers, problems can come up when workers turnover is excessive.

In case your worker leaves throughout the lease time period for a automobile, for instance, the enterprise is left with the continued month-to-month funds, or an early termination cost for ending the lease early.

Wage sacrifice FAQs

Listed here are the solutions to continuously requested questions on wage sacrifice:

Can staff choose in and choose out of wage sacrifice schemes?

Sure, wage sacrifices are voluntary.

If an worker needs to choose in or out of a wage sacrifice association, you could alter their contract with every change. Your worker’s contract should be clear on what the money and non-cash entitlements are at any given time.

Subsequently, sacrifice preparations are typically in place for at the very least 12 months, except the worker experiences a life-style change.

In that case the preparations can be reviewed, then adjusted or faraway from the worker’s contract.

Does wage sacrifice seem on a payslip?

Sure, a wage sacrifice ought to seem on an worker’s payslip.

The sacrificed quantity shall be proven as a deduction made earlier than tax and Nationwide Insurance coverage are utilized.

Can wage sacrifice be backdated?

No, a wage sacrifice can’t be backdated.

It’s solely legitimate from the purpose you and your worker make the settlement, which is the date their contract is signed by each events.

Can wage sacrifice be necessary?

No, it’s a voluntary discount to an worker’s wage, which should be agreed on by each employer and worker earlier than it takes place.

Subsequently, you shouldn’t mechanically enrol staff in a wage sacrifice scheme.

The place can I discover extra particulars about wage sacrifice?

The authorities web site covers details about wage sacrifice and what it means for employers and their staff.

There are particulars on quite a few subjects, together with altering the phrases of a wage sacrifice association to what it means for office pension schemes.

It’s also possible to communicate to a payroll knowledgeable or an accountant who affords payroll providers.

Ultimate ideas on wage sacrifice

After getting the processes set in place, a wage sacrifice association is a win-win for each you and your staff.

Along with tax financial savings and added comfort, they’ll additionally promote good financial savings habits, low emission transport selections, and a more healthy way of life.

As an employer, you don’t have to supply each scheme however contemplate surveying your staff to seek out out which of them they really feel they’d most profit from.