Posted December 18, 2015

What is salary sacrifice and would it benefit my business?

A salary sacrifice arrangement is when an employer and an employee agree to reduce the employee’s salary in return for certain benefits.

There are financial advantages for both the employer and the employee if a salary sacrifice arrangement is agreed as the employee’s remuneration shifts from cash (where tax and National Insurance (“NI”) is due) to non-cash benefits (which are wholly are partially exempt).

A salary sacrifice arrangement only works if the benefits are involved are tax free, these include:

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

The employee should consider whether the arrangement is right for them as sacrificing part of their salary means they earn less which could impact things like mortgage applications or their state pension.

The two main items employees use salary sacrifice for are pension contributions and childcare vouchers. We have considered the potential tax and NI savings below.

Salary Sacrifice for Childcare vouchers

	Basic Rate Tax Payer (£)	Higher Rate Tax Payer (£)	Additional Rate Tax Payer (£)
Maximum amount of vouchers	243	124	97
Annual cost	2,916	1,484	1,166
Tax and NI savings for employee	933	623	606
NI savings for employer	402	205	161
Total savings	1,335	828	767

You should note accepting childcare vouchers from an employer may affect an employee’s tax credits. HM Revenue and Customs have produced a calculator to help your employees decide whether salary sacrifice for childcare vouchers would be best for them.

Salary Sacrifice for Pensions

Under this scheme your employee agrees to sacrifice part of their salary and the employer agrees to make additional contributions to their pension.

Salary	25,000	35,000
Employee’s pension contribution before salary sacrifice	5%	5%
Employer’s pension contribution before salary sacrifice	2%	3%
Tax and NI savings for employee after salary sacrifice	221	308
NI savings for employer after salary sacrifice	203	284
Total savings	424	592

Offering a salary sacrifice arrangement could result in significant savings for you and your staff.

You can even use salary sacrifice with automatic enrolment and as the employees’ minimum pension contributions are set to increase to 5% in 2018 the savings could add up.

If you are interested in setting up a salary sacrifice arrangement or would like further information, please get in touch.