Salary Sacrifice - What does it all mean

Salary sacrifice is an arrangement where an employee agrees to forgo a portion of their gross salary in exchange for certain benefits provided by their employer.  These benefits can includepension contributions, childcare vouchers, or leasing an electric car.  It can be a tax-efficient way to be remunerated, as both the employee and employer may save on National Insurance Contributions (NIC) and income tax. 

It can also be used to keep taxable income below certain thresholds to preserve tax allowances and other benefits such as tax free childcare.

How Salary Sacrifice Works:

1. Reduction of Salary:

   • The employee’s gross salary is reduced by an agreed amount before tax and National Insurance contributions are calculated. This means that the employee effectively pays tax and NI on a lower salary.

     
     

2. Benefits Provided:

   • In exchange for the reduction in salary, the employer provides a non-cash benefit. Common examples include additional employer pension contributions, cycle-to-work schemes, electric vehicles, and some health insurance plans.

     
     

3. Tax and NIX  Savings:

   • By reducing the gross salary, the employee lowers their taxable income, which can lead to tax savings. It also reduces the amount of NIC for both the employee and the employer.

Common Benefits Under Salary Sacrifice:

• Pension Contributions: One of the most popular uses of salary sacrifice is for additional pension contributions. This can be advantageous as both parties save on NI, and the employee increases their retirement savings.

• Electric Car Schemes: With the focus on reducing emissions, salary sacrifice for electric vehicles has become popular, especially since these cars often have a lower Benefit in Kind (BIK) tax rate.

• Cycle-to-Work Schemes: These allow employees to lease bicycles for commuting, offering savings on the cost of the bike and equipment through a reduction in salary.

Overall, salary sacrifice arrangements can be beneficial for both employers and employees, but it is important to carefully consider the implications and potential effects on overall remuneration and benefits.