Salary sacrifice is a government backed scheme designed to help employers and their workers save on tax.
How does it work?
An employee agrees with their employer (by changing the terms in the employee’s working contract), to give up part of their salary in exchange for non-cash benefits.
There is a range of of non-cash benefits suitable for salary sacrifice. Some of the most common benefits include pension contributions, cycle-to-work scheme, childcare vouchers and company cars schemes.
What are the advantages?
- For tax free benefits, such as pension contributions, employees can sacrifice a portion of their salary in order to receive the benefit. Since the amount sacrificed is deducted from the employee’s salary before tax, the results are lower tax and Employee’s and Employer’s National Insurance Contributions.
- For taxable benefits, the employee still receives a saving on Employee National Insurance Contributions between 2 to 12%.
- Offering salary sacrifice arrangements can attract the top talent for a business and can increase employee retention.
What are the disadvantages?
- Entitlement to other benefits, such as statutory maternity pay, statutory sick pay and redundancy pay may be affected, as they will be based on the reduced salary.
- Since the gross salary is being lowerred, there might an impact to any credit or mortgage applications.
- The salary sacrifice scheme could cause extra administrative work and problems managing the benefits provided, especially if the employee turnover is high.
