Before the chancellor’s Autumn Budget in the final week of October, many savers were concerned that he was intending to clamp down on salary sacrifice.

Salary sacrifice is a popular method in the UK for workers and business owners to save money in tax while also making the most of their pay cheques.

Ultimately, Rishi Sunak made no such announcement, but it may have left you wondering: what exactly is salary sacrifice, and how could it help you?

So, find out everything you need to know about salary sacrifice, including how it works, the benefits for both employers and employees, and the potential disadvantages of using it.

Exchanging your cash salary for benefits

Salary sacrifice involves reducing your take-home cash pay in return for another benefit. Typically, this is for a non-cash benefit.

By doing this, you can potentially reduce your Income Tax bill and National Insurance contributions (NICs).

Salary sacrifice schemes that allow you to do this include:

  • Employer-provided childcare, such as a workplace nursery or childcare vouchers
  • Bicycles, including the “cycle to work” scheme
  • Ultra-low emission vehicles, including company cars.

One of the most popular uses of salary sacrifice is using it in return for increased pension contributions. Essentially, you take a lower salary in return for higher pension contributions.

Salary sacrifice means a change in terms and conditions of an employment contract, so both an employee and an employer have to agree to it before any salary is reduced.

Benefits of salary sacrifice

There are a range of reasons to consider salary sacrifice, both for employers and employees.

Reduce employee Income Tax and National Insurance contributions

As salary sacrifice essentially involves receiving less employment income, it allows you to reduce your employment Income Tax payments and National Insurance contributions (NICs).

This is because some benefits aren’t included in your total renumeration package and so are not calculated as part of your salary.

As a result, taking salary sacrifice can allow you to reduce your tax bill.

Bear in mind that not all benefits fall under the salary sacrifice rules. These will be subject to the “benefit in kind” rules and may require you to pay tax separately.

If you’d like to find out what sort of benefits you could make the most of, please speak to us.

Increase your pension contributions

One of the main reasons that employees consider salary sacrifice is because it can allow you to boost your pension fund.

If you choose to reduce your cash salary in return for pension contributions, you can have the full amount invested directly into your pension fund. These contributions will also benefit from tax relief at your marginal rate of Income Tax.

Crucially, there are no Income Tax payments or NICs to make on pension contributions. This makes pension salary sacrifice arrangements highly tax-efficient.

Employers pay less in NICs

Employers can also benefit from allowing their employees to make use of salary sacrifice.

By reducing what you pay to your employees directly, you’ll have to pay less in employer NICs. This could save you a considerable sum, especially if many of your employees choose to take you up on the offer.

If you wanted to incentivise your employees to use salary sacrifice, you could even offer to pay part of the savings from your NICs into your employees’ pensions.

Things to consider

There are plenty of advantages to using salary sacrifice. However, there are also a couple of other things that you might want to consider, particularly for employees.

Reduced work benefits

If you have workplace benefits such as a death in service arrangement, the amount that your employer would pay to your family if the worst happened will likely be linked to your salary.

This means that if you reduce your salary, it may have the knock-on effect of reducing the amount your family receive if you die while working for your employer.

Mortgage affordability

Similarly, mortgage lenders will typically calculate and decide on your affordability directly from salary figures, rather than taking other benefits into account.

As a result, by sacrificing part of your salary, it may have a direct impact on either the amount you’re able to borrow or even your likelihood of a lender accepting your application.

Impact your eligibility for state benefits

You may also see some of your state benefits impacted. For example, salary sacrifice may affect your entitlement to statutory maternity pay.

Work with us

If you’d like help working out whether salary sacrifice could be a good option for you as an employee, or if you could consider it as an employer, please get in touch with us at Lightside Financial Planning.

We have years of experience helping employees and employers to make the most of their money, no matter what that means to you.

Email or call 0151 372 0161 to find out how we could help you.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.