If your employer offers a salary sacrifice scheme, you could be entitled to join. Here’s what it means for you and your money.
What is salary sacrifice?
In a nutshell, salary sacrifice is when you give up part of your earnings in exchange for a non-cash benefit.
There are lots of salary sacrifice schemes that employers can choose to opt into. Typically, schemes are used to boost pension contributions, but other benefits include childcare vouchers and Cycle to Work arrangements.
Salary sacrifice is something you’ll need to agree with your employer – they can’t enrol you into a plan without your consent.
What are the pros and cons of salary sacrifice?
The biggest advantage is reduced Income Tax. Both you and your employer will also benefit by paying lower National Insurance (NI) contributions. This is because the deductions are made from your gross pay (the amount before tax). This reduces your overall salary, so there is less to tax in the first place.
Some employers choose to pass on the savings they make on their National Insurance contributions. For example, they could use it to top up your workplace pension. There’s no obligation to pass on these savings, so it’s something worth bearing in mind if you’re currently weighing up different employers and perks.
Of course, while paying less tax seems a good thing, there is a flip side. Taking a salary sacrifice and accepting lower overall pay could affect things like:
- Mortgages – because you’re earning less on paper, it could affect the amount a lender is willing to loan.
- Life insurance – life cover is often worked out as a multiple of your salary, with the ideal level of cover equalling 10 times your annual earnings. A lower salary is likely to mean less cover, which may not be enough to meet your beneficiaries’ needs.
- State benefits – a lower salary could affect your state pension. It could also have an impact on other benefits like Jobseeker’s Allowance or Employment and Support Allowance, which are based on your NI contributions.
- Bonuses paid by employers – if you’re entitled to a bonus, you could end up short changed if it’s based on your salary sacrificed pay. To avoid this, some employers will base your bonus on something called your notional pay. This is the amount before any salary sacrifice is deducted.
Who can get a salary sacrifice?
If the organisation you work for offers a salary sacrifice scheme, then you’ll be eligible to opt in depending on the terms set out by your employer.
The only time you can’t enter a scheme is if a salary sacrifice means you take home less than the National Minimum Wage (NMW). It’s up to employers to work this out, so you shouldn’t have to worry about this too much.
Do all salary sacrifice schemes mean paying less tax?
In short, no. Changes were introduced in April 2017 to try and put a stop to what critics saw as an unfair benefit.
The argument was that lower-paid workers often weren’t eligible for salary sacrifice schemes. This is because a reduction would take their pay below the NMW.
Higher earners, on the other hand, could be entitled to a number of perks. This could include benefits like reduced school fees, laptops, smartphones, and expensive company cars. On top of this, they could end up paying lower Income Tax and National Insurance.
The changes mean that only certain schemes are eligible for pre-tax deduction and, therefore, benefit from lower tax rates. These are:
- Employer provided childcare
- Cycle to Work
- Ultra-low emissions vehicles (this can include company cars)
- Buying extra holiday days
Although the rules came into effect in 2017 for new schemes, legacy arrangements were allowed to run their course. However, that comes to an end in April 2021.
You might not think it, but salary sacrifice may still be worthwhile despite some benefits now being taxable. For instance, you could benefit if your employer has secured lower costs for certain items like club membership fees.
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