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|
|Tax and NI savings for employee||933||623||606|
|NI savings for employer||402||205||161|
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.
|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|
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.
The information contained above is provided for information purposes only and is not intended to amount to advice on which reliance should be placed. We therefore disclaim all liability and responsibility arising from any reliance placed on such information. Professional advice should be obtained before taking or refraining from taking any action as a result of the above contents.