Salary sacrifice (also known as salary exchange) allows you to give up some of your salary in exchange for extra benefits from your employer. It’s a tax-efficient way to receive benefits and/or to make extra contributions to your pension. As a result, you will pay lower national Insurance contributions, and in some circumstances, also pay less in tax.
How does salary sacrifice work?
Many employers offer salary sacrifice schemes, allowing employees to swap a portion of their salary for non-cash benefits, such as technology or a bicycle. This is also known as salary sacrifice, and one of its most common applications is in pension contributions. By doing so, your take home pay will increase.
Salary sacrifice is arranged by making a small adjustment to your employment contract with your employer so you'll receive a contractual change agreement when you take part in any salary sacrifice schemes.
Sounds great, can everyone do it?
Not everyone can take part in a salary sacrifice. If you earn a lower wage, it might not be possible to reduce your salary because your pay must remain above the national minimum wage. Your employer will be able to let you know if you can/can't take part in any of the schemes they provide.
Salary sacrifice and tax
When you give up part of your wages through a salary sacrifice scheme, the deduction is made before you pay tax or national insurance, which reduces the amount of tax and national insurance you have to pay. For some benefits, you'll still pay tax, but this will be applied at the end of the tax year or show on your payslip each time you are paid. Benefits that you pay no tax or national insurance on are:
Salary sacrifice pensions
Salary sacrifice Cycle2Work
Salary sacrifice Childcare (Workplace nursery scheme)
Salary sacrifice EV car scheme (Reduced tax)
Salary sacrifice EV charge scheme
You'll see that the EV car scheme has some tax attached, but this is much less than than the amount you save from sacrificing the hire costs each pay period.
Does my employer save money too?
Yes, on the salary sacrifice schemes listed above, your employer also saves on national insurance contributions. Some may choose to pass these savings on to you through enhanced benefits or increased pension contributions. However, not all benefit schemes provide savings for employers.