Employers face a big challenge in attracting and retaining the best staff, particularly in very competitive industries. One way that they can do this is through salary sacrifice schemes, which have been developed in recent years as an incentive to employees who can opt in or opt out at their discretion.
What is a salary sacrifice scheme?
Salary sacrifice is a scheme run by the employer, whereby an employee can sacrifice a portion of their salary in return for non-cash benefits. There are many ways in which the money can exchanged, but these differ by employer and are at the discretion of the employer. Common benefits include additional pension contributions, child care vouchers and company cars.
How do salary sacrifice schemes work?
An employee will be offered a type of salary sacrifice scheme and the non-cash benefits will be explained. When agreed, this now means that your gross salary will be reduced and you will sign a contract to this extent with your employer. However, in most cases this is a flexible arrangement and as well as the amount of salary being given up varying according to the non-cash benefit being received, the employee can also opt out of the scheme at any time. Bear in mind though, that you may still face a financial obligation towards whatever you were receiving the benefit for, ie. a vehicle or a mobile phone etc.
What are the benefits of a salary sacrifice scheme?
The main benefit to the employee is that you don’t have to pay tax or national insurance contributions on the portion of your salary you give up, but this does not apply to all benefits. This effectively means that you are receiving more direct benefits through your salary and less is going out in tax. In addition, your employer will not be required to pay their employers’ national insurance contributions on the portion of your salary that you sacrifice. So there is a benefit to the employer also.
What benefits can be claimed without paying tax and national insurance
From April 2017 the Government announced some non-cash benefits would no longer be exempt from PAYE and national insurance. This included some company cars, accommodation and school fees, and particularly with vehicles, this came as a blow to many people, but there are still many benefits to being involved in such schemes, as we will discuss shortly. The following items remain as non-cash benefits which can be claimed tax-free:
- employer-provided childcare
- ultra-low emission vehicles, which can include company cars
- retraining courses and outplacement services
- intangible benefits, such as health insurance and buying additional annual leave
Intangible benefits are also known as ‘flex plans’ and ‘cafeteria benefits’ and include items such as additional life insurance or critical illness cover, private health insurance, additional annual leave or, alternatively, giving up holidays in return for extra cash. All these ‘intangible benefits’ are exempt from tax and national insurance.
What do I need to consider when I am offered a salary sacrifice scheme?
There are a few things you need to think about when offered a salary sacrifice scheme, which may balance out the obvious benefits. First and foremost, you will never see the money, it will only ever come in the form of a non-cash benefit, but more specifically:
- Because you are earning less through a salary sacrifice scheme this could affect things like maternity pay or your eligibility for a mortgage. In your application, the amount of money a lender will make available for a property purchase is based on your income.
- If you are on a low income you are unlikely to be offered a salary sacrifice scheme, as the reduction in your salary could take it beneath the minimum wage threshold.
- Lower earnings can affect your state pension contributions and possibly also your job seekers’ allowance. However, you may be able to claim more tax credits to help with this.
- Any life insurance cover you claim through your work will be reduced, though you should check this with your employer.
Salary sacrifice schemes for vehicles
If you signed up to a salary sacrifice scheme for a company car before April 2017, you can still enjoy tax benefits until 2022. But even after that, you can still enjoy the many other benefits of leasing a car through your employer, such as the affordability of a better quality of vehicle, smaller or no deposits, no road tax or maintenance costs and no hassle with depreciation or trading the vehicle in.
Most importantly, however, Ultra-Low Emission Vehicles (ULEV) are still exempt from tax and national insurance under a salary sacrifice scheme, so any vehicle which emits 75g/km of CO2 or less, ie. all electric vehicles (EVs), are exempt from the 2017 tax rules. Of course, this is a bid to improve the UK’s Zero carbon targets and increase the use of EVs, but it does stand as an extremely attractive benefit to vehicle users who lease a car through their business.