What Is Salary Sacrifice & Why Is It Important For A Micro Business?

A micro business employee rejecting a pay rise in favour of choosing salary sacrifice incentives.
Written by MicroStartups

Nowadays, most privately-owned companies in the UK are micro businesses, which is a classification that describes a business operating on a small (or very small) scale. 

These small businesses are responsible for 13.3 million jobs around the United Kingdom — but how, despite their micro-stature, can these organisations maintain growth and support the needs of their talented employees? The answer: salary sacrifice. 

While the definition of a micro business is broad in scope (there are around 5,936,545 according to the latest government figures), these many millions of operations share the same challenges — namely, cash flow management, recruitment, and retention. 

So, with these factors in mind, we seek to explore how your business can use salary sacrifice to help employees get more value from their role when money becomes a blocker.  After all, it’s unrealistic to think a micro business (or fledgling startup)  can keep pace with the salary packages offered by big multinationals. 

Instead, you should focus on creating a people-centric work culture that, of course, fulfils basic physiological needs like food, water, and security, but also self-fulfilling, psychological needs such as community, prestige, and accomplishment. 

Read on as we outline what salary sacrifice is and why it’s important for your micro business. 

Salary sacrifice definition

First and foremost: what is salary sacrifice? 

Salary sacrifice is an arrangement between you (the employer) and your team members to trade part of their salary in exchange for non-cash incentives. This can include gym memberships, access to company cars, and additional pension contributions (but more on that later). 

One truth is clear at the crux of this arrangement — your current (and prospective) employees earn less money. And while this is a deal-breaker for many professionals, such “sacrifice” opens the door to a range of exciting opportunities your business — and your staff — may not otherwise be able to afford. 

For instance, salary sacrifice, when properly tailored to your team’s wants and needs, is an effective tool that gives employees more control over their role and helps them earn tax breaks on rewards they can genuinely benefit from. 

Benefits and challenges associated with salary sacrifice

Salary sacrifice isn’t for everyone. Not least because giving up part of your salary is a serious consideration to weigh up, but also you cannot offer it to an employee if the reduced earnings would take them below minimum wage — a stipulation that may restrict your ability to offer salary sacrifice to your employees.

With that said, there are many benefits to salary sacrifice if your business fits the bill: 

  •  Reduced Income Tax and National Insurance (NI) contributions
  •  Paying less in salary means funds can be reinvested into the business

Despite these benefits, salary sacrifice does present your micro business (and its employees) with a set of challenges: 

  • Lower salary might affect mortgage rates and how much people can borrow
  • State benefits entitlements like statutory maternity pay could be affected

Think of salary sacrifice as a two-sided coin: tails provides the flexibility for your team to enjoy benefits they wouldn’t otherwise have access to — and heads? Well, this presents a situation where your team earns less money, which can prove detrimental to financials in their private life, like mortgage applications and various state benefits. 

Salary sacrifice ideas for your micro business

While your micro business cannot provide the large salaries offered by competing corporations, nor likely buy a shiny new company car, you can create a more enticing package for current and prospective employees. 

Here are four popular examples:

1. Employee pension contributions

It’s now your legal responsibility to enrol employees in a workplace pension scheme — but why stop at the bare minimum? If your micro business wants to improve employee retention then it needs to secure finances over the long term. 

With this in mind, providing additional pension contributions in place of a pay rise is a tax-efficient way to help your team save for retirement. This often manifests in an arrangement where your business pays an additional percentage, equal to the salary your employee has sacrificed.

2. Cycle to work

A cycle to work scheme encourages healthy living and pollution reduction, which contributes to your business corporate responsibility — a major step, especially if your micro business aspires to become a B Corp

Moreover, with a cycle to work programme, employees tend to save 25-39% on the cost of bike ownership, maintenance, and accessories, which eases the burden of travel. 

3. Gym membership

Care about the physical and mental wellbeing of your team? Well, your business can offer gym memberships at corporate rates via salary sacrifice. 

Savings for these memberships tend to vary. For example, some are completely free, while others place a discount on fees. 

4. Childcare vouchers

Parents in your team can save by paying for childcare with their pre-tax salary — but how does this work? 

As the employer, you source tax-free vouchers that can be used by your team at a childcare provider of their choice. While there is lots of flexibility with this scheme, it’s important to take note that there are limits to how much can be claimed. For instance, each parent can request a maximum of £243 per month that is exempt from tax and NI contributions. 

So how can salary sacrifice support your micro business? It all depends on the needs and wants of your team. Salary sacrifice, after all, is a flexible concept that allows you to tailor benefits to an individual. 

With that said, salary sacrifice is also a divisive topic that does not suit everyone — this is particularly true for micro businesses with employees working on (or close to) the minimum wage. If your business does fit the bill, however, then you can approach employee satisfaction in a more affordable, people-centric way. 

About the author


A team of writers and marketers, MicroStartups was founded to inspire the entrepreneurial and business community to give back. We believe in business growth through giving and supporting the local community.

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