Overview
Salary exchange is an arrangement between you and your employer in which you agree to exchange part of your salary or bonus for a non-cash benefit provided by your employer.
Examples of Tax Efficient Salary Exchange benefits
Pensions
Childcare vouchers
Cycle to Work schemes
Company cars
Primary benefits
By exchanging part of your salary, your overall gross pay is lower, so you pay less tax and national insurance. You'll still see your full salary on your payslip, and you'll also see the salary sacrificed amount listed too.
National Insurance Savings
The amount you can save will vary depending on your earnings:
If your total earnings over the tax year are under £50,270, you'll save 8% of the benefit amount.
If your total earnings over the tax year are over £50,270, you'll save 2% on the benefit amount.
Did you know: A tax year runs from 6th April to the 5th April the following year.
Tax Savings
The amount of tax you can save will depend on which tax band you fall into. If you're unsure, you can ask your HR or Payroll team.
If you're a basic rate taxpayer, you'll save 20% on the benefit amount
If you're a higher rate taxpayer, you'll save 40% on the benefit amount
If you're an additional rate taxpayer, you'll save 45% on the benefit amount
Example:
Based on a Cycle2Work salary sacrifice scheme where the employee is sacrificing £100 a of their salary each month.
For a basic rate taxpayer who is earning less then £50,270, they'll save a total of 28%(20% in tax, and 8% in national insurance), giving them a monthly saving of £28.
For a higher rate taxpayer who is earning over £50,270, they'll save a total of 42% (40% in tax, and 2% in national insurance), giving them a monthly saving of £42.
Secondary benefits
Income related Government support
If any financial support you receive from the Government or other body is income-related, you may find that by reducing your gross salary by a sacrificed amount, the level of support you are entitled to is increased. You can use online calculators to see how a reduced gross salary will affect your entitlement such as Turn2us.org.uk or entitledto.co.uk.