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Self Assessement 2018/19: Salary sacrifice scheme

Salary sacrifice, also called salary exchange, is an arrangement employers may make available to employees – the employee agrees to reduce their earnings by an amount equal to the employee’s pension contributions.

In exchange for reducing the amount of earnings paid to employees, the employer then agrees to pay the total pension contributions – from the employee and the employer. Any contributions paid to us will be treated as employer only.

Using salary sacrifice means that the employee and employer pay less National Insurance contributions. Employers may decide to maximise the amount of pension contributions by adding the savings they make in lower employer National Insurance contributions to the total pension contribution amount they’ll pay.

Salary sacrifice affects the employee’s terms and conditions of employment and is a matter of employment law, not tax or pensions law. 

How salary sacrifice works

Many organisations now offer salary sacrifice schemes. The idea behind this is fairly straightforward. You give up part of your salary and, in return, your employer gives you a non-cash benefit, such as childcare vouchers, or increased pension contributions.

Once you accept a salary sacrifice, your overall pay is lower, so you pay less tax and National Insurance.

In addition, your employer will not have to pay their Employers’ National Insurance contributions on the part you sacrifice. Some employers pass on some or all of these savings to you.

What to consider before taking a salary sacrifice

  • Sacrificing part of your salary means you earn less. This might affect maternity pay or mortgage/ loan applications.
  • Lower earnings might also affect your State Pension or contribution-based state benefits. These might include Jobseeker’s Allowance and Employment and Support Allowance. However, you might be able to claim more tax credits.
  • A lower salary, as a result of salary sacrifice, means any life cover through a scheme at work could be less. It’s worth checking – some employers do provide life cover at your original salary so you don’t lose out.

Salary sacrifice benefits can include:

  • Company cars
  • Childcare vouchers
  • Work-related training
  • Cycle to work schemes
  • Car parking near your workplace
  • Additional employer pension contributions

Salary sacrifice and bicycles

Many employers allow their employees to use ‘Cycle To Work’ schemes to save money on the purchase of a bicycle.

You start by choosing the bike you want. Your employer, who effectively leases it to you, buys the bike. Many employers can reclaim the VAT and have the option of passing this saving on to you. Note; your salary will be reduced by the net cost of the bike for the hire period.

Once this hire period ends, you can buy the bike from your employer at a 'fair market value' set by HMRC. After one year:

  • Bikes costing more than £500 = 25%
  • Bikes costing less than £500 = 18%

If your hire period is longer than a year, you can buy the bike for less. This scheme also allows you to avoid tax and National Insurance on the part of your salary you sacrifice, resulting in significant savings. 

Childcare vouchers

The process of receiving and paying with our Childcare Vouchers is designed to be simple and straightforward for both employers and employees.

Most employers who provide Childcare Vouchers do so through a salary sacrifice scheme.  This means you agree to reduce your salary by a certain value, and receive Childcare Vouchers to the same value but pay no tax or National Insurance on these vouchers.

To join your employer's Childcare Vouchers scheme you first of all need to complete a salary sacrifice agreement.  Your employer will direct you on how to do this.

After your agreement has been submitted to your employer, they will reduce your salary by the requested amount and arrange for vouchers to be provided to you.

Childcare Vouchers

Level of tax you pay

Tax-free voucher limit

Basic-rate tax

£243 a month

Higher-rate tax

£124 a month (if you have joined the scheme on or after 6 April 2011). If you joined before then, you can have up to £243 a month.

Additional-rate tax

£110 a month (if you have joined the scheme on or after 6 April 2011). If you joined before then, you can have up to £243 a month.

Note: If your employer offers any extra childcare vouchers, then you will pay tax on them

Pension increase & salary sacrifice

Giving up part of your salary and directing it to your pension instead can reduce National Insurance (NI) and income tax contributions. In the example below the employer would save on NI contributions and might be persuaded to add this saving to the pension contribution, boosting the amount paid towards your pension even more.

 

Example

For someone earning £25,000 during 2017-18, where both employee and employer pay 3% of the salary into a personal pension scheme. 

The employer cuts the amount paid in salary by £1,000 but makes a corresponding additional contribution to the employee's pension fund.

Exempt schemes

Although anyone joining a scheme in April 2017 will not get the PAYE tax advantages some benefits will continue to be offered PAYE and NI-free through salary sacrifice schemes after April 2017.

These include:

  • Childcare
  • Cycle to work schemes
  • Ultra-low emission cars
  • Pensions (including advice)

Salary sacrifice schemes can carry many different terms and conditions it’s advisable to check with your employer’s benefits or human resources team (or dedicated intranet websites, if available) whether there are any additional benefits and or risks associated with belonging to these schemes.