Salary sacrifice is a workplace scheme whereby the employee gives up some of their earnings in return for a non-cash benefit.
In certain circumstances, both the employer and the employee save NICs on any salary ‘sacrificed’ and where the benefit is exempt from tax then the employee will also save income tax.
However, it is important to note that depending upon the type of benefit provided, the savings may be limited to employees’ NICs.
The following benefits have exemptions applied to them where no Income Tax or NIC will be applicable when operated through salary sacrifice:
- Additional pension contributions
- Cycle to Work scheme
- Childcare vouchers up to the value of £55 per week (where started on or before 4 October 2018)
Employers can set up a salary sacrifice arrangements by changing the terms of the employee’s employment contract which the employee must agree to. The salary entitlement must be formerly waived before the employee is due to be paid.
A salary sacrifice arrangement must not reduce an employee’s cash earnings below the National Minimum Wage.
Salary Sacrifice arrangements could be more attractive since the NI rises in the budget
In the budget last month, the Chancellor announced an increase in the rate of NICs paid by employers. From 6 April 2025, employers’ NICs will increase by 1.2% to 15% and the per-employee threshold at which employers start to pay NICs will be reduced from £9,100 per year to £5,000 per year. This will cost employers on average an additional £900 per employee per annum (based on average earnings).
A way of mitigating some of the effects of this rise is for employers to agree with employees on certain ‘salary sacrifice’ arrangements which would have the effect of reducing both employer’s NIC and employee’s NIC costs.
Additional pension contributions through salary sacrifice
One of the most common ways to take advantage of salary sacrifice is by making additional pension contributions.
It should be noted that there is a limit to how much an individual can put into a pension each year, and get tax relief – this is the annual allowance.
For most people the annual allowance is the equivalent of their annual salary up to a maximum of £60,000, but it can get complicated with salary sacrifice, especially for higher earners so it’s best to take proper financial advice if you are considering offering additional pension contributions through salary sacrifice.
Salary sacrifice car scheme – electric vehicles (EVs) are a cost efficient benefit for staff
Employers can offer employees a company EV through salary sacrifice, where the employer leases a vehicle on behalf of the employee and payments are made from deductions to the employee’s pre-tax salary.
The employee normally suffers income tax on the higher of the taxable company car benefit and the amount of salary sacrificed. However, where the car is an ultra-low emission vehicle the rules are more generous and income tax is the lower of the car benefit and the salary sacrificed.
What are the benefits of salary sacrifice to the employee?
- Potential Tax and NI savings
- Allows the employee some degree of choice in how their remuneration package is structured
- It can be an incentive for employees to save more into a pension
Are there any drawbacks of salary sacrifice for the employee?
The main drawback with salary sacrifice is that it reduces the individual’s taxable salary which which could limit mortgage borrowing.
If you need our advice about anything to do with salary sacrifice arrangements, please get in touch with our expert team via our website.
