Guy Clarkson, UK Digital Growth Leader, Mercer Marsh Benefits
With some employers potentially able to save tens of thousands, in national insurance contributions (NICs), here are four ways to optimise your salary sacrifice arrangement.
1. Don’t restrict opportunities to opt into salary sacrifice schemes
Traditionally, salary sacrifice schemes tend to be opened up once a year, for employees to sign-up for a non-cash benefit during an annual benefits period, when they first join the company or at the start of a 12-month scheme. Although this can help to keep things simple for the employer, it may restrict the number of people opting into schemes and therefore the potential savings.
For example, not all employees will be ready to purchase a new bike through a salary sacrifice scheme during a benefits window at the start of the annual benefits window. So even though this might appear to keep it easier to keep track of when a twelve-month scheme is due to come to an end, it may be better to offer salary sacrifice schemes all year round.
To help avoid this becoming an ongoing administrative challenge, employee benefits software can be used to automatically allow employees to opt into schemes. As well as seamlessly connecting with suppliers and payroll to take the correct deductions, it will also automatically stop payments once they’ve bought their bike, for example, so no one is charged for longer than they should be.
2. Make salary sacrifice schemes the default option
Another reason salary sacrifice schemes fail to generate the full tax and national insurance savings possible, is due to leaving it up to employees whether or not to have a core benefit, such as employee pension contributions, paid via salary sacrifice. This requires employees to understand the complexities of a pension salary sacrifice scheme themselves, which may lead some employees to shy away from opting into something that could have helped them and their employer save money.
Instead of making core benefits an optional salary sacrifice scheme, making them a default option for employees to opt out of may encourage many more people to remain opted in. Alternatively, if employers still want to leave it up to employees to opt in, the visual tools and calculators included in employee benefits software, such as Darwin, can help employees better understand the options on offer.
3. Use simple language to educate and explain
For some employees, the language used to describe ‘sacrificing’ some of their salary may be confusing or feel like they might be losing out. To help clarify this to employees, explain how they would simply be ‘exchanging’ some of their salary to have a valued benefit in place of this.
Similarly, some of the rules around salary sacrifice deduction, or exchange, can be very confusing, as not all benefits generate the same tax savings and basic rate taxpayers are eligible for different savings compared to higher rate taxpayers. Also, people close to the national minimum wage or on very variable pay might not be eligible at all.
All of this could become confusing to individuals, and deter them from wanting to participate, so it can again be worth using employee benefits software to show employees what they are eligible for, and exactly what they can expect to save. Solutions such as Darwin, also allow you to easily run segmented campaigns, to promote different benefits to different rate taxpayers.
4. Link salary sacrifice arrangement to your wider people strategy
Another way to help optimise take up is to ensure your salary sacrifice schemes are closely aligned to your wider people or wellbeing strategy. For example, if you have a strong environmental agenda, tax free bikes and electronic vehicles could be a good fit for this.
If you want to reduce the risk of burnout to employees, allowing employees to buy extra holiday days can support this and help generate substantial national insurance contribution savings for employers. While encouraging employees to opt into health screening and other health benefits may reduce the number of people taking sick leave, to save money on sickness absence, statutory sick pay and staff replacement costs also.
Similarly, if you want to focus on the financial wellbeing of your people, better communicating the tax savings for them can be helpful. As can promoting the option to top up pensions for employees as part of a policy to help individuals prepare for a positive retirement.
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