Tax Glossary

Salary Sacrifice

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Last updated on:
March 17, 2024

Salary sacrifice schemes offer a strategic way for employees to optimize their earnings and benefits package, directly impacting their take-home pay and taxable income. By agreeing to a lower cash salary in exchange for non-cash benefits, employees can access valuable services or products while simultaneously reducing their Income Tax and National Insurance contributions. This arrangement can lead to significant savings and enhance an employee's overall compensation package.

Employers also benefit from salary sacrifice schemes by paying lower Employers' National Insurance contributions on the reduced salary portion. This mutual advantage makes salary sacrifice a popular choice among both employers and employees.

It's important to note that not all benefits are eligible for salary sacrifice arrangements. The government has specified that only certain benefits, such as childcare vouchers, bikes for commuting, ultra-low emission cars, and pension contributions, can be part of these schemes without incurring additional taxes. Opting for benefits outside of these specified categories may result in the benefits being taxed as additional income.

There are some considerations to keep in mind with salary sacrifice schemes:

  1. Visibility on Payslip: The details of the salary sacrifice should be clearly indicated on the employee's payslip, showing the reduced salary and the corresponding non-cash benefit.
  2. Minimum Wage Compliance: Employees cannot reduce their cash salary below the National Minimum Wage through a salary sacrifice arrangement. This ensures that employees' basic income needs are protected.
  3. Potential Impact on Financial Applications: As salary sacrifice schemes result in a lower official cash salary, this might affect applications for mortgages or loans, where the total income figure is a critical factor in the approval process.

Salary sacrifice schemes are a practical tool for employees looking to maximize their benefits while minimizing tax liabilities. However, it's essential for employees to carefully consider the implications of entering into such arrangements, particularly regarding their long-term financial goals and needs.

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