Salary sacrifice is a government-backed scheme designed to help employers and their employees save money on tax payments. If an employee opts for salary sacrifice alongside their employer, they will give up part of their pre-taxed salary in exchange for non-cash benefits.

Essentially, salary sacrifice is a relatively simple way to reduce your tax, often by keeping earnings below income tax thresholds and being rewarded for your work in other ways. 

41% of all UK SMEs and 85% of very large organisations offer some form of salary sacrifice, according to the Chartered Institute of Personnel Development.

Salary sacrifice

My employer offers salary sacrifice. Should I opt in?

By giving up part of your salary in return for non-cash benefits, the money you’re paid every month is reduced, meaning that you and your employer will pay less in national insurance contributions, saving both parties money.

Salary sacrifice can also be an excellent way to reduce your taxable income if you’re paid more than the higher or additional rates of income tax (£50,270 or £125,140). It’s common for would-be higher earners to cap their pay below these thresholds and instead have their additional earnings paid in other means.

For example, salary sacrifice benefits might include increased contributions paid directly into your pension scheme (normally for equivalent value), as well as access to company car or cycle to work schemes. As the employer has to perform the majority of the administration involved in salary sacrifice, it is relatively hassle-free from an employee’s perspective.

If you are above 55, or close to retirement age, salary sacrifice will enable you to increase your pension sum by a considerable amount, while knowing that this money will soon become readily available.

What are the downsides of salary sacrifice?

While there aren’t many downsides of salary sacrifice, there are still some things to be aware of before you opt into the scheme as an employee, or before you offer the scheme as an employer. 

As an employer, implementing a salary sacrifice scheme is likely to come with some administration costs, including updating payroll, amending contracts, and submitting an additional compliance check. Although there may be some upfront costs, you’ll likely find that you’ll make this back relatively quickly through national insurance savings alone.

There are also some potential implications to be aware of as an employee if you’re thinking of opting in to salary sacrifice. As it will effectively lower your overall income, this may have a knock-on effect on other aspects – such as life insurance, credit card borrowing limits, mortgage borrowing and statutory maternity pay.

Are there any alternatives to salary sacrifice?

Yes, there are – and these are definitely something to consider before opting into salary sacrifice, because it’s important to review all options carefully before making any decisions.

One alternative is to set up an easily accessible savings account, such as an ISA. While ISAs cannot help to reduce the national insurance you pay, they will not impact your affordability like salary sacrifice can, which can be preferable depending on your individual circumstances. 

Or, you could also consider paying into a separate personal pension, claiming back tax while receiving preferential tax codes for future tax years.

The best way to be completely sure that you’re making the right decision is by speaking with your financial adviser. We will review your financial situation and consider all potential factors that may be affected, before making our recommendations.

With our help, you can rest assured that you’re making the right decision for both you and your family’s future – simply get in touch today for a free consultation.