Salary sacrifice seeks to offer you more value from your role without increasing your base salary.
As outlined in official government guidance, salary sacrifice is an arrangement between your employer and yourself to reduce entitlement to cash pay, typically in return for a non-cash benefit. This can include additional pension contributions, childcare vouchers, company cars, and gym memberships.
Your employer cannot offer salary sacrifice if it reduces your earnings below the minimum wage of £8.72 per hour.
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What does salary sacrifice look like?
Salary sacrifice involves giving up a portion of your salary, meaning your pay is reduced. However, this needn't be a bad thing. After all, salary sacrifice decreases the amount of income tax and National Insurance you pay. As such, you often take home more money than you otherwise would. In addition, your employer also benefits from a reduction in the National Insurance contributions they pay.
But what exactly can salary sacrifice be put towards? And is it worth the hassle? The following benefits will not be subject to tax or National insurance contributions should you agree on a salary sacrifice arrangement with your employer:
- Additional pension contributions
- Low emission vehicles and company cars
- Cycle to work schemes
- Additional annual leave
Read on as we explore these benefits and paint a clearer picture of what salary sacrifice might look like for you.
When it comes to salary sacrifice and pensions, you agree to reduce your salary by an amount equal to your current pension contributions. In exchange, your employer agrees to pay your employee pension contributions, too. This means both your employer and yourself pay less National Insurance, and savings can be used to maximise your pension.
Supplying company cars under salary sacrifice is often a cost-neutral benefit that can make both existing and prospective employees seem more attractive.
Despite initial costs, leasing company cars under salary sacrifice carries a low risk for the employer because you pay all the leasing costs.
Should your employer decide to extend the benefit of a company car using a personal fuel allowance, you need to take into account the company car fuel benefit. This is an additional tax you pay if the business has provided a car and fuel to use in your own time. Employees are subject to the company car fuel benefit because HMRC considers the business is giving away free fuel.
Cycle to work scheme
Cycle to work schemes are some of the most popular salary sacrifice benefits. They provide tons of value, allowing you to afford premium cycles and improve your commuting experience.
Typical cycle to work schemes require your employer to purchase the bike you want, which they then lease to you. But keep in mind your salary is reduced by the net cost of the bike for that hire period.
Your employer might have the option to reclaim VAT and choose to pass these savings onto you. Once the hire period is over, you can purchase the bike at a fair market value set by HMRC.
Additional annual leave
In a bid to promote greater flexibility and smarter working, many employers allow you to purchase additional annual leave using salary sacrifice. For example, North Lincolnshire Council operates a Holiday Plus scheme, providing its employees with the opportunity to buy annual leave on top of their standard entitlement subject to approval.
What are the potential pros and cons of salary sacrifice?
For some, salary sacrifice is an ideal way to get more from their employment package. For others, it’s a restricting process that means they earn less money for little reward.
Pros of salary sacrifice
Salary sacrifice is popular because it can have significant benefits.
While you might be earning less money on paper, the main advantage of salary sacrifice is the possibility of greater take-home pay. Why? Because you (and your employer) make lower National Insurance and Tax contributions.
Here are some of the main pros of salary sacrifice:
- Greater flexibility: you choose where your money goes
- Tax breaks: foregone salary is not subject to tax or National Insurance contributions
- Increased savings: salary savings can be reinvested into the business
Salary sacrifice is a sensible and widely effective way to ensure you get the most value from your role. This is done by using tax-free earnings to purchase benefits you would otherwise buy with your base salary.
Potential drawbacks of salary sacrifice
Salary sacrifice isn’t for everyone.
While salary sacrifice isn't available if you would be taken under the National Living Wage, there are many other reasons why it might not be the right option for you and your family.
Here are some notable potential downsides to salary sacrifice:
- Reduced state benefit entitlements: maternity pay and state pensions reduced if salary falls
- Lower borrowing: mortgages and loans are also worked out as a multiple of your salary
Moreover, when you opt-out from a salary sacrifice arrangement, employers adjust the refund to repay national insurance contributions — which is certainly an issue you should carefully consider.
What are the tax implications of Salary sacrifice?
The tax implications of a salary sacrifice arrangement depend on the pay and non-cash benefits that make up this arrangement. The business needs to pay and deduct the correct tax and National Insurance contributions for the benefits provided.
How do you calculate the value of a non-cash benefit? Well, in the United Kingdom, if your employer wants to set up a salary sacrifice arrangement, they’ll need to establish value using the higher of the following two factors:
- The total amount of salary you sacrifice
- The total earnings charged under current benefit in kind rules
Exemptions to benefits in kind, a name given to benefits of monetary value provided to employees, do not apply to salary sacrifice schemes. As such, the only benefits a business does not have to report to HMRC are payments into pension schemes, pension advice (provided by the employer), workplace nurseries, bicycles and cycling safety equipment.
Is salary sacrifice worth it?
Salary sacrifice can be beneficial when looking for financially sustainable ways to get more from your employment package. And though receiving a good, fair salary remains an important motivating factor, extending this value in other, tax-free areas means you can take home more pay and experience a range of great benefits.
That said, salary sacrifice isn’t for everyone. It requires a change in contract and has to be carefully discussed and agreed upon with your employer.