What Are Salary Sacrifice Schemes?

Salary sacrifice schemes are becoming an increasingly popular option for employees and employers in the UK. These schemes allow employees to exchange part of their salary for benefits, usually leading to both tax savings and a boost in overall job satisfaction. But what are salary sacrifice schemes, exactly, and how do they work?

In this post, we’ll dive into what salary sacrifice schemes are, how they function, the benefits they offer, and the rules and regulations surrounding them.

What is a Salary Sacrifice Scheme?

A salary sacrifice scheme is a financial arrangement in which an employee agrees to give up a portion of their pre-tax salary in exchange for non-cash benefits, which are usually provided by their employer. This arrangement can be beneficial for both the employer and the employee, as it can lead to tax and National Insurance (NI) savings.

Under a salary sacrifice scheme, the salary reduction is made before taxes are applied, so both the employer and the employee may save on tax and NI contributions. The types of benefits employees may receive through salary sacrifice schemes can range from pensions and health insurance to childcare vouchers and car leasing.

How Do Salary Sacrifice Schemes Work?

Salary sacrifice schemes typically work by reducing an employee’s gross salary in exchange for a benefit or service provided by their employer. This means the amount of taxable salary is reduced, and therefore, the employee’s tax and NI contributions are lower.

For example, let’s say an employee has a gross salary of £30,000 per year and enters into a salary sacrifice arrangement to receive £2,000 worth of additional benefits, such as pension contributions or a company car. Their taxable salary would now be £28,000, meaning they’ll pay less tax and National Insurance on that amount.

Common Salary Sacrifice Benefits

Salary sacrifice schemes can be used to access a variety of benefits. Some of the most common benefits include:

• Pension Contributions: One of the most popular forms of salary sacrifice is using it to increase pension contributions. Employees can sacrifice part of their salary to boost their pension pot, which offers long-term financial security and additional tax benefits.
• Childcare Vouchers: Although the scheme closed to new applicants in October 2018, employees who are part of the scheme may still continue receiving vouchers through salary sacrifice, helping them save on childcare costs.
• Bike to Work Scheme: This allows employees to sacrifice part of their salary in exchange for a bike and safety equipment, promoting a greener and healthier lifestyle.
• Company Cars: Many businesses offer salary sacrifice schemes where employees can exchange part of their salary for a company car. The car is usually provided with low-cost or no-cost running expenses such as insurance and maintenance.
• Health and Dental Insurance: Employers may offer private health insurance or dental plans as part of a salary sacrifice scheme, allowing employees to access high-quality healthcare at a reduced cost.
• Technology and Equipment: In some cases, employees can exchange their salary for gadgets or technology, such as laptops, mobile phones, and other work-related equipment.