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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.

What are some examples of salary sacrifice schemes?

Some of the most common instances of non-cash benefit which motivate a salary sacrifice include:

How does the salary sacrifice process work?

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.

 

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Do I need to deduct tax for salary sacrifices?

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:

Essential points for employers about salary sacrifice

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.

The pros and cons of a salary sacrifice

Like everything, there are ups and downs to salary sacrifice schemes.

 

Main advantages

Main disadvantages

  • Lower overall salary means employees pay less tax and National Insurance contributions.
  • Salary sacrifice can also reduce employer’s NI contributions.
  • Earning less for the employee can impact things like maternity pay, mortgage applications and pension contributions.
  • Salary sacrifices can also affect Statutory Sick Pay (SSP) and in some cases, cause employees to loose entitlement altogether. In order to be entitled to SSP, an employee’s average weekly earnings must be above the Lower Earnings Level (LEL). If a salary sacrifice causes earnings to fall below the LEL, they may no longer receive SSP.
  • Life cover may also be affected, however some employers choose to still cover this in line with the employee’s original salary. This is something that will probably vary from business to business.

 

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About The Author

Suzanne Goodier-Dodson

I'm a Payroll Manager with a degree in Mathematics, responsible for overseeing every aspect of payroll for our clients. In my spare time, I love to travel and going to gigs. Read my Staff Spotlight.

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