You may have heard the term “salary sacrifice” on occasions and wondered what it is. Have you ever wondered if you should participate in the scheme either as an employee or an employer? Basically, is salary sacrifice a good idea?
What is Salary Sacrifice?
Salary sacrifice schemes are not a new thing and have been around for a while now. But you know what it is like, it might have been a popular topic at one time only to be forgotten over the years. Until it is time to rethink again.
It is an arrangement between an employer and an employee whereby the employee agrees to a reduction in salary to gain a benefit.
In return the employer agrees to provide the benefit to the employee.
Under this arrangement both parties would then pay less National Insurance and the employee pays less PAYE tax.
The administration of this is straightforward hence making it a popular perk in the workplace which delivers tax savings at the same time. There are of course other perks you can provide to your staff.
What can you Salary Sacrifice?
The system has been tightened in recent years and so there are now only a handful of benefits you can provide via this scheme.
Prior to April 2017 the arrangements were more widely available for benefits such as company cars and gym membership to name a couple. It is estimated that roughly it cost HMRC £1billion worth of tax revenue and hence changes were introduced.
The benefits where a salary sacrifice scheme could now apply are as follows:
- Payments into pension schemes
- Employer provided pension advice
- Workplace nurseries
- Bicycles and cycle to work scheme
- Certain Electric Cars
- Childcare voucher but only if it started before October 2018
Salary sacrifice for pension contributions
This is the most popular area where most people use the current salary sacrifice arrangements. It allows for a better pension in the future whilst delivering tax savings today.
As part of workplace pension arrangements employers are required to offer a pension scheme to employees over the age of 22 and earning more than £10,000 per year. This could be done via a salary sacrifice pension scheme generating extra benefit for the employee as a result.
There is also a National Insurance saving for the employer. The tax and National Insurance savings can be clearly demonstrated in a simple example below.
Example
If you have a salary of £38,000 per annum and both you and your employer are currently paying the minimum amount which is 8%. You are paying 5% into your pension (£1,900) and your employer is paying 3% (£1,140) into the pension scheme.
What would the figures look like pre and post salary sacrifice arrangements?
| Pre Salary Sacrifice | Post Salary Sacrifice | |
| Gross Salary | £38,000 | £36,100 |
| Taxable Income | £25,430 | £23,530 |
| Take Home Pay employee | £27,982 | £28,210 |
| Employer NIC | £4,024 | £3,761 |
| Pension Contribution Total | £3,040 | £3,040 |
We would suggest that before deciding on the numbers you do your calculations but in most cases you are looking at a lower liabilities for the employment taxes.
There are also ways where the benefits are extended such as if savings in National Insurance are ploughed back into the pension scheme. Clearly this will be of benefit in the future but may not be affordable for most right now.
Is the scheme hard to set up?
The scheme is not difficult to set up and in most cases you just need to check with the pension company that they are happy to accept the pension contributions under the salary sacrifice scheme.
There may be couple of forms to complete but that should be all.
The payroll provider needs to be informed so the pension is set up correctly on the system.
There is no separate requirement to inform HM Revenue and Customs (HMRC).
Other Practical Steps to consider with Salary Sacrifice
- Before you decide on whether to embark on a salary sacrifice scheme, work out the sums.
- Salary sacrifice can impact on benefits such as maternity allowance, incapacity benefits and State Pension so careful consideration needs to be given. Take advice.
- Each time an employee opts into a salary sacrifice scheme you must amend the contract.
- Don’t forget to alter the contract when someone decides to opt out too.
- The salary sacrifice cannot lower the salary to below the minimum wage.
It is worth bearing in mind that not all employees will qualify for salary sacrifice. If someone is on a low or minimum wage it may not be possible to salary sacrifice.
However, with the National Insurance going up in April by another 1.25%, salary sacrifice arrangement for pensions at least is going to get more popular. Salary sacrifice remains a good idea.
If you need advice in this area, please contact your normal director. If you are not working with us yet, please email Priya at priyar@myersclark.co.uk