We are all familiar with salary sacrifice schemes such a childcare vouchers, cycle or car buying schemes and perhaps these are a method of making a job vacancy appeal to a wider audience. But what about an employee – could a perceived benefit be a sacrifice too far?
What is a salary sacrifice?
A salary sacrifice happens when an employee gives up the right to receive part of their salary and in return their employer gives them a non-cash benefit that is ideally exempt from tax and National Insurance.
In simple terms, once an employee accepts a salary sacrifice, their cash pay is lower, so they pay less tax and National Insurance. In addition, their employer will not have to pay their Employers’ National Insurance contributions on the part the employee sacrificed. In practice, employers may pass on some or all of these savings to the employee.
Salary sacrifice schemes come in many guises, but before an employee signs up to forfeit part of their salary they should weigh up the pros and cons of the scheme and the possible effect it may have on their existing or future benefit entitlements.
So what should an employee consider before entering into a salary sacrifice arrangement?
It is essential to understand what the sacrifice will mean in practical terms. and the effect, or potential effect that a reduction in pay may have on:
- their future right to the original higher cash salary (pay increases etc)
- any pension scheme being contributed to
- entitlement to Working Tax Credit (WTC) and Child Tax Credit (CTC)
- entitlement to State Pension or other benefits such as Statutory Maternity Pay (SMP), Statutory Sick Pay (SSP) etc.
Each employee has differing needs and they should carefully consider the implications of reducing their earnings and the potential hit this may make on their NIC contributions in the future.
So before leaping on the band wagon of the latest and greatest employee incentive schemes, advise your employees to consider their needs and get advice from your HR Department or benefits office.
For further advice about the possible effect of salary sacrifice on your future visit the Pension Advisory Service.
Or to see how salary sacrifice could affect your tax credits or childcare vouchers view Childcare Voucher Calculator.