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Salary Sacrifice Explained

In this Salary Sacrifice guide we provide answers to some of the more common questions surrounding Salary Sacrifice. If you have not already done so, we recommend you first read our Introduction to Salary Sacrifice, a guide which explains the fundamentals of Salary Sacrifice, how Salary Sacrifice reduces your annual PAYE Income tax bill and can support financial security for you and your families futures.

Are salary sacrifice contributions be tax deductible?

No, salary sacrifice contributions are not tax deductible. Depending on the benefit you receive, the payments you make may reduce your taxable income, which in turn means that your payments are essentially tax-free. This includes schemes for:

  • Pensions
  • Childcare
  • Cycle to work
  • Ultra-low emissions vehicles
  • Retraining courses
  • Intangible benefits

However, there are certain schemes that you still have to pay PAYE on. It’s well worth checking about your own salary sacrifice schemes, as there are so many available.

If I have bad credit can I use salary sacrifice?

Yes, you do not have to undergo a credit check to enter into a salary sacrifice scheme, as any money (agreed by the you and the creditor) is taken from your salary before it even gets to you.

If you intend to use a salary sacrifice scheme for investments or non-essential items it’s wise to pay off any debt first. 

How much salary sacrifice can I make?

Terms will vary between employers, but generally you just have to make sure your take home pay after salary sacrifice is more than the national minimum wage.

Keep in mind that only certain schemes will allow you to make the payments exclusive of tax and National Insurance.

Can I backdate salary sacrifice?

No, a salary sacrifice agreement is only valid from the date the contract is drawn up between you and your employer

Is salary sacrifice compulsory?

No, Employees will probably have a contractual entitlement to their current salary. If it is reduced as part of salary sacrifice then this amounts to a change in their contractual terms. If this is done without the employees' explicit agreement then this could amount to a breach of contract.

Most employees are unlikely to complain if they gain overall from salary sacrifice. In practice, employers often automatically include employees in salary sacrifice, while at the same time allowing them to opt out if they wish. Most importantly employers should ensure that employees are kept fully informed about all aspects of the salary sacrifice and its impact on employees both before and after implementation.

Is salary sacrifice suitable for everyone?

No, salary sacrifice isn’t suitable for everyone. You should think about the following:

  • The impact on any other benefits that are linked to salary, for example death benefits or overtime although it’s still possible for the employer to use a ‘notional’ or pre-sacrifice salary for these benefits
  • Mortgage lending that may be linked to actual salary received
  • Statutory benefits which may be affected by a reduction in salary, e.g. Statutory maternity and paternity pay

It’s important you understand your individual situation and if it’s the best option for you.

Will salary sacrifice affect my state pension?

Salary sacrifice is unlikely to affect your entitlement to the state pension, unless your lowered salary is under the threshold to make National Insurance contributions. 

Your starting amount for the state pension may also include a deduction if you were in certain earning-related pension schemes before 6 April 2016, or had certain workplace, personal or stakeholder pensions before 6 April 2012.

What else can be claimed as part of salary sacrifice?

In addition to some of the options already outlined, certain employers may allow you to use salary sacrifice for: 

  • School fees
  • Laptops
  • Mobile phones and tablets
  • Mortgage payments and rent
  • Annual travel cards
  • Share schemes
  • Annual leave
  • Health screening checks
  • Car parking near your workplace
  • Work-related training
  • Gym memberships

Note: Some of these benefits may be taxable. It’s your responsibility to check with your employer and make sure you fully understand the benefit you're signing up for.

What about the future of salary sacrifice? 

Following consultation, the tax and National Insurance benefits of salary sacrifice schemes have been removed from 6 April 2017, meaning they will be liable to the same tax treatment as cash income, with the following exceptions:

  • Pensions (including pension advice)
  • Childcare
  • Cycle to Work
  • Ultra-low emission cars 

All other salary sacrifice arrangements in place before 6 April 2017 were protected until 5 April 2018, and salary sacrifice arrangements in place before 6 April 2017 for cars, accommodation and school fees will be protected for up to 4 years (until 5 April 2021).