Salary Sacrifice explained for small business owners

Many employees could be taking advantage of a salary sacrifice, but because of lack of knowledge or sheer hesitation, they’re missing out on the benefits.

In this article, we’ll clarify what a salary sacrifice is and what it means in terms of tax compliance. We’ll also explore some of the core advantages and disadvantages of taking a salary sacrifice so that, as a salaried employee, you can make a more informed decision.

What is a salary sacrifice?

As the name suggests, a salary sacrifice is when an employee agrees with their employer to relinquish a portion of their salary in exchange for a non-monetary benefit. This must be contractually agreed upon between employee and employer.

Some of the most common non-cash benefits that motivate somebody to make a salary sacrifice are:

• Further employer pension contributions
• Company car
• Childcare vouchers or provision
• On-site parking
• Cycle-to-work scheme
• Training opportunities
• Additional annual leave

If you are a full-time employee with additional earnings from self-employment on the side, we would recommend speaking to a qualified accountant who will be able to advise on tax efficiency.

Do you have to pay tax on salary sacrifice?

When a salary sacrifice scheme is in place, employees are still required to pay the regular tax and National Insurance on their salaried income.

If the person is also receiving a non-cash benefit in exchange for a portion of their salary, they’ll normally still need to pay tax and NI on the value of this benefit.

Most common examples of non-cash benefits won’t be recorded on a payslip and must be reported to HMRC as a benefit-in-kind using a P11D form. However, there are some exceptions to this rule, such as:

• Pension scheme payments and/or pension advice provided by the employer
• Childcare vouchers (including those provided directly by the employer pre-October 2018)
• Cycle to work schemes
• Workplace nursery provisions

The advantages of a salary sacrifice for employees

There are two main benefits of taking a salary sacrifice, the first and most obvious being:

Access to benefits you don’t have to tangibly ‘pay’ for

The nature of a salary sacrifice means that a person does not have to deduct things like additional employee pension contributions, workplace parking, or childcare costs from their’ take-home’ pay.

Of course, the employee is paying for the benefit in a roundabout way, but the amount is already deducted in exchange for the non-monetary benefit, making it much clearer and easier to budget the income they bring home each month.

Less tax and National Insurance contributions to pay for

Some benefits, such as pensions, are tax free, so opting to take a salary sacrifice in exchange for some benefits means you won’t pay as much tax and NI.

Some things to consider

Although there are many benefits to making a salary sacrifice, as detailed above, some downsides should be considered before making any decisions.

Consequences of lower income

A salary sacrifice means that, technically, the person is then bringing home fewer earnings. This can influence things like maternity pay, mortgage applications, and pension contributions.

Impact on Statutory Sick Pay (SSP)

A salary sacrifice also has the potential to affect an employee’s SSP and in some instances, even negate a person’s entitlement completely. This is because for somebody to be eligible for SSP, their average weekly earnings need to be above the Lower Earnings Level (LEL).

So, if a salary sacrifice causes earnings to drop below the LEL, the employee is no longer entitled to SSP.

Impact on life cover

In some cases, an employee’s life cover may also be affected. This can vary from individual to individual as some employers may still choose to cover this.

If you choose to take a salary sacrifice, it’s vital to ensure the details are reflected in your employment contract.

It’s also crucial to make sure that any salary sacrifices made don’t cause earnings to drop below the National Minimum Wage. Employers should have formal processes in place to monitor and manage this.

This guide was kindly written by The Accountancy Partnership – Providing online accountancy services nationwide for a low, fixed monthly fee

You can read the government’s official guide to salary sacrifice for employers here.