Salary sacrifice allows workers to give up part of their salary in exchange for additional benefits from their employer, such as childcare vouchers, a cycle-to-work scheme or increased pension contributions. Signing up to a salary sacrifice scheme may be beneficial, but it’s worth looking at all the options before you do so.
The advantages
If you decided to join a salary sacrifice scheme, your overall wages will be lowered. This means you will pay less income tax and will also avoid paying the 12% national insurance (NI) contributions on the amount you sacrifice. For every £68 you sacrifice from your pay packet, £100 will go into your pension pot. If you pay the higher tax rate you will only have to give up £58 to deposit £100 into your pension pot and as a top-rate taxpayer, the sacrifice is just £53.
In addition to this, as your employer will not have to pay national insurance contributions on the part of your salary you sacrifice, some or all of this saving may be passed on to you, depending on the scheme. You may also be able to claim more tax credits as your income level will drop.
The disadvantages
As you will be earning less, this could have a knock-on effect when it comes to other financial aspects of your life. Mortgage applications and maternity pay may be negatively affected, for example, as may your state pension and work-based life cover policy. Check whether any of these benefits will be affected before you make a decision.
Your salary sacrifice options
Depending on your scheme, salary sacrifice options may include childcare vouchers, increased workplace pension contributions, cycle-to-work schemes, company cars, mobile phone benefits, work-related training, and workplace car parking.
If you choose to sacrifice part of your salary, your employer may give you tax-free vouchers to pay for childcare or one of the other benefits. However, restrictions may apply. For example, while you can choose your own childcare provider, the individual or company will have to be Ofsted-approved or state-registered to qualify for the scheme.
There will also be a limit to how much you can claim in tax-free vouchers. Basic-rate taxpayers can claim up to £243 a month. Providing they joined the scheme on or after April 6, 2011, higher-rate taxpayers can claim up to £124 per month and additional-rate taxpayers can claim up to £110 a month. Any additional childcare vouchers provided by your employer will be subject to tax.
Salary sacrifice with Cintra Payroll Services
If you are an employer, Cintra Payroll Services can work with you to set up a salary sacrifice scheme, explaining the key benefits and any drawbacks that may arise. We can help to implement the scheme, ensuring that your employees receive the benefits they are entitled to, that they pay the right amount of tax, and that you fulfil your employer tax liabilities without paying more than you need to.
If you have queries about salary sacrifice, pensions, tax or managed payroll, contact Cintra Payroll Services today.