Salary sacrifice benefits are those benefits in which employees sacrifice a portion of their salary in exchange for non-cash benefits in kind, which are popular with both employees and employers. As an employer, you can save money by paying lower national insurance contributions (NICs) on reduced employee wages - these savings can be used to improve other aspects of the benefits the business is offering. Employees save money by paying less income tax and national insurance contributions because of their reduced pay. Additionally, such arrangements provide employees with a choice of flexibility over the benefits they receive and the structure of their remuneration package.
What is Salary Sacrifice?
A salary sacrifice arrangement is a contract between an employee and an employer in which the employee agrees to exchange a portion of their pay for non-cash benefits.
If you intend to take advantage of the salary sacrifice arrangement, you must request your employer.You can request that they explain your cash and non-cash entitlements if you enter into an arrangement.You are advised to evaluate the benefits of these schemes against the potential impact on your pension.Consult your employer to determine what salary sacrifice schemes are available – if any.
How do salary sacrifice schemes operate?
You will enter into a salary sacrifice agreement with your employer, agreeing to forego a specified amount of pay in exchange for a particular benefit. For the arrangement to be effective the salary reduction should be in writing and mustbe implemented properly with a degree of permanence such that the employee cannot give notice to revert to original level, then the benefit will not be treated as earnings. Therefore, the employee will not pay Class 1 NICs in respect of the taxable amount.
Do I pay less tax with salary sacrifice?
The introduction of the Optional Remuneration Arrangements (OpRA) legislation in April-2017, limited the tax and NIC benefits that could be achieved under the salary sacrifice arrangements. Where the legislation applies, the actual amount taxed in respect of the provision of a benefit by way of salary sacrifice is the higher of the salary that the employee would have received or the amount taxable under the benefit rules. This higher amount will be subject to Class 1A NICs. The OpRA do not apply to the benefits mentioned below:
- Contribution to registered Pensions
- Childcare provided by the employer
- Cycles and cyclist safety equipment
- Ultra-low emission cars
- Retraining courses and outplacement services
By foregoing a portion of your salary, you reduce your take-home pay, reducing your income tax and National Insurance contributions.Additionally, your employer's National Insurance contributions will be lower. This implies that a greater portion of your money is spent on items that benefit you – such as your pension – and less is collected in taxes.
What are the benefits of a salary sacrifice?
- Accelerates the growth of your pension fund - Sacrificing a portion of your pay is one approach to accelerate the growth of your pension pool, as your employer contributes more each month.
- Reduces income tax and national insurance contributions - The amount of tax and national insurance you pay is related to your taxable earnings; reducing your salary reduces your tax and national insurance contributions as well.
- Additional tax relief on pensions - The amount deducted from your salary is not subject to income tax or national insurance contributions. This saves you money, as standard pension tax relief just repays income tax and does not cover national insurance.
Your company should provide you with an overview of salary sacrifice and whether they will contribute a portion or all the NIC’s, they save to your pension account.Additionally, you might request that your company analyse the effect of salary sacrifice on your take-home income. You are not required to proceed with salary sacrifice if you believe you will not benefit enough.
dnsumbrella provides you with the end-to-end solution necessary to manage your employmentbenefits. We can assist you in maximising the benefits of Salary Sacrifice, lowering your expenditures, and providing a boost to your savings. Please speak to one of our specialists at dns umbrella by calling us on 020 3500 2615 or email us at info@dnsumbrella.co.uk..