Salary sacrifice schemes, offered by many employers as part of an overall benefits package, are seen as a good way to save staff money and help spread costs. In essence, the employee gives up part of their salary in exchange for a non-cash benefit. As this comes out of pre-tax pay, this is significant because they don’t pay tax or National Insurance (NI) on the salary that is sacrificed. In addition, the employer doesn’t have to pay their employer’s NI contribution on the ‘sacrificed’ portion either, so it can be seen as a win-win situation for all concerned.
For these reasons, the schemes are broadly considered to be a good thing. After all, everyone likes a way to save tax!
How much can be saved depends on what tax the employee pays and how much of their salary they’re setting aside, but if someone was sacrificing £100, this is how it would work:
- A basic-rate taxpayer would avoid paying £20 in income tax (charged at 20%) and save another £12 in NI contributions (charged at 12%). In effect, £100 in benefits for a reduction in take home pay of just £68.
- A higher-rate taxpayer would avoid paying £40 in income tax (charged at 40%) and £2 in NI contributions (charged at 2%) – £100 in benefits for a reduction in take home pay of £58.
- An additional-rate taxpayer would avoid paying £45 in income tax (charged at 45%) and £2 in NI contributions (charged at 2%) – £100 in benefits for a reduction in take home pay of £53.
Salary Sacrifice is an established and HMRC approved method of paying pension contributions, which enables National Insurance (NI) savings for both the employer and the employee. It’s a great way of getting people into saving for retirement as the pension payments are made automatically but it does, of course, depend on whether it’s right for that particular employee and their situation.
Although generally seen as positive, the schemes do mean a reduction in ‘take-home’ pay and so have to be suitable for the particular individual. With a reduction in earnings that can be knock on impacts into the provision of some state benefits, and also into the ability to access finance such as mortgages. In addition, the very word ‘sacrifice’ can make people wary and reluctant to give up some of their salary; in fact, many Salary Sacrifice schemes are now often referred to as Salary Exchange instead. From the employer’s point of view, the schemes need to be formally managed and require changes to employment contracts.
Change is on the horizon, however. In the 2016 Autumn Statement, the Chancellor announced that he was going to abolish some ‘salary sacrifice’ tax perks on a range of employee benefits from 5th April 2017. Several schemes will close to new members at this point then stop entirely after a period of time. Some of the prominent ones being taken away are:
- Company cars (unless they’re ultra-low emission vehicles)
- work-related training
- Car parking near the workplace
- Health screening checks
- Mobile phones, computers and other tech
- Accommodation
- Gym membership
- School fees
Those that will remain are:
- Pension contributions
- Childcare
- Cycle-to-work schemes
- Ultra-low emission cars
It’s always important for individuals to consider any employee benefit offered to them as part of their overall financial planning, and not rely on it as a top-up measure in isolation, and for most people this means understanding both the value of the benefit and also the financial impact on their savings and/or take home pay.
At Creative, we specialise in advising employers and employees about Salary Sacrifice and our consultants have been doing so for over 30 years. It is our wealth of experience in this area that makes us experts in advising employers on the benefits they can, and should, provide for their staff while helping employees understand the offering available to them and how they can best incorporate these into their personal financial plans.
Should you wish to discuss your benefit offering, and see where the use of Salary Sacrifice could help you and your staff, then please contact your normal Creative consultant or email us on
info@creativeeb.co.uk to arrange for one of our consultants to contact you.