Salary sacrifice, also known as ‘salary exchange’ schemes, occurs when you agree to ‘sacrifice’ a part of your salary in exchange for other, non-cash benefits from your employer. These can include childcare vouchers or a company car, but the most common is increased pension contributions from your employer.
Salary sacrifice plans are now available in many workplaces. The concept is straightforward. You gave a portion of your salary in exchange for a non-cash benefit such as childcare vouchers or increased pension contributions from your employer.
You pay less tax and National Insurance when you accept a salary sacrifice because your overall pay is lower.
Furthermore, your employer will not be required to pay Employers’ National Insurance contributions on the portion you sacrifice.
What is a Salary sacrifice pension?
Salary sacrifice enables you to avoid a portion of your salary to receive additional benefits from your employer. It’s a tax-efficient way to increase your pension contributions, and both you and your employer will pay lower National Insurance Contributions on your lower salary.
If you participate in a workplace pension, both you and your employer will make monthly contributions. In the United Kingdom, the minimum donation required by your employer is 3%, though they may choose to contribute more.
Salary Sacrifice benefits examples
Salary sacrifice schemes are only beneficial to you and your employer if the benefits are tax-free. These are some examples:
- Childcare vouchers
- Work-related training
- Cycle-to-work schemes
- Car parking near your workplace
- Additional employer pension contributions
Things to consider before making a salary sacrifice
- You will earn less if you give up a portion of your salary. It could have an impact on maternity pay or mortgage applications.
- Lower earnings may also have an impact on your State Pension or other contribution-based state benefits. Jobseeker’s Allowance and Employment and Support Allowance are two examples. However, you may be able to claim additional tax credits.
- A lower salary due to salary sacrifice means that any life insurance provided through a workplace scheme may be less. It’s worth checking – some employers offer life insurance at your actual salary level, so you don’t lose out.