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:

• Childcare vouchers
• Additional pension contributions
• Company cars
• Cycle-to-work schemes
• Parking
• Work-based training
• Additional annual leave

How does the salary sacrifice process work?

Both the employer and the employee must agree to the salary sacrifice scheme, and the terms shown in the employee’s contract.

The employee has basically swapped 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.

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.

• Payment into a pension scheme and/or pension advice provided by the employer
• Workplace nursery services
• Childcare vouchers (and those provided directly by the employer before October 2018)
• Cycle to work schemes (including bicycles and safety equipment)

Essential points for employers about salary sacrifice

• The employee’s employment contract should always reflect the details of any salary sacrifice scheme.
• 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 the employers 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

• Lower overall salary means employees pay less tax and National Insurance contributions.
• Salary sacrifice can also reduce employer’s NI contributions.

Main disadvantages

• 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 be entitled to 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

John Atherton

AAT Level 3 qualified, I specialise in providing payroll functions and services for a wide variety of clients and businesses.