Salary sacrifice is a type of arrangement between an employer and employee that allows the employee to give up part of their salary in exchange for certain benefits.
This can be done in order to reduce the amount of tax they pay, as well as to receive additional benefits such as ultra-low emission vehicles or tax-free childcare. The employer will then use the sacrificed salary to provide these benefits, which are usually exempt from tax and National Insurance (NI) contributions.
The main advantage of salary sacrifice is that it works by reducing the employee’s gross salary before tax, meaning that they will pay less income tax on their reduced salary. This can result in significant savings for both the employer and employee, depending on how much of their salary is sacrificed.
It is important to note that any money given up through a salary exchange cannot be reclaimed at a later date, so it should only be considered if you are sure you want to commit to it long-term.
What types of benefits can be salary sacrificed?
Typically, benefits an employee receives that can be salary sacrificed include:
- Pension schemes
- Company cars
- Electric cars
- Bike to work
- Workplace nurseries
- Work related training
- Mobile phones, laptops and other technology
How does salary sacrifice work?
This is a way of paying for alternative benefits while being liable for less tax. It works by allowing employees to give up part of their salary in exchange for certain benefits.
This means that the employee pays less income tax on their salary and can benefit from the additional savings or services provided by the employer.
The amount of money sacrificed depends on the individual’s circumstances and the type of benefit they are looking to receive. For example, if an employee wants to put more money into a workplace pension scheme, they could opt for salary sacrifice and pay less income tax as a result.
Similarly, if an employee wants to cover childcare costs, they could opt for salary sacrifice and receive these vouchers without having to pay any additional taxes.
Things to know as an employee
When considering a salary sacrifice scheme, it is important to discuss the details with your employer. This includes understanding how much of your salary will be sacrificed and whether this will move you from a higher to lower tax band.
It is also important to consider any benefits linked to salary that may decrease, such as death benefits and life insurance, sick pay, redundancy payments, overtime rates and statutory benefits like maternity/paternity pay.
Additionally, you should understand if bonuses, pay increases and pension benefits will be affected by the scheme. Finally, it is important to know the terms surrounding departure from a salary sacrifice scheme in order to determine if there are potential refunds on contributions.
Overall, it is essential for employees to understand the implications of entering into a salary sacrifice scheme before committing. It is important to discuss all aspects of the scheme with your employer in order to ensure that you are making an informed decision that best suits your financial situation. Knowing all of the details can help you make an educated decision about whether or not a salary sacrifice scheme is right for you.
Things to know as an employer
Employers should be aware of the legal requirements when it comes to salary sacrifice. An employee's salary cannot drop below National Minimum Wage by law, so you must ensure that any salary sacrifice arrangement does not reduce an employee’s pay below this level.
Employers should also provide employees with an overview of how salary sacrifice might affect them, including letting them know whether their pre- or post-sacrifice salary will be used to determine benefits such as overtime rates or sick pay.
In addition, employers should review the terms of their contract of employment and consider any additional administration costs associated with implementing a salary sacrifice scheme. If an employee is off work, you may have to continue with their pension contribution even if they are not receiving paid leave. It is important for employers to understand these obligations and ensure that they are compliant with all relevant legislation when setting up a salary sacrifice scheme.
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