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A salary sacrifice is exactly what it sounds like – a partial sacrifice of an employee’s salary . But why would somebody want to do this? Well, employees can decide to sacrifice part of their salary, and receive something else in return. This is often in the form of a tax-free, non-cash benefit from their employer.
Some of the most common instances of non-cash benefit which motivate a salary sacrifice include:
The employee basically swaps part of their salary in exchange for something else. This means that their pay is lower, but they receive a non-monetary benefit to the same value instead. Both the employer and the employee must agree to the salary sacrifice scheme, and the terms shown in the employee’s contract.
The employee would normally pay tax and NI on their income. They’ll have a payslip which shows how much they are paid, and any deductions that have been made. If the employee receives a non-cash benefit in-exchange for a portion of their salary, they usually still have to pay tax and NI on the value of the benefit.
This is true for most types of benefits, such as company cars or gym memberships. They’re not shown on the payslip, and the employer is responsible for reporting the benefits in kind to HMRC, using a P11D. There are some exceptions though, such as:
The employee’s employment contract should always reflect the details of any salary sacrifice scheme. It’s also important that any changes to salary as a result of a sacrifice must not push earnings below National Minimum Wage. Procedures must be in place to adequately cap and control this.
It is also the employer’s responsibility to ensure that the correct amount of tax and National Insurance is paid for the money and benefit(s) provided.
Like everything, there are ups and downs to salary sacrifice schemes.
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