What Is A Salary Sacrifice Scheme?Written on June 25, 2015 by Kirk Rice LLP
Taxing Times QuestionsThe Question:
My employer has approached me with the idea of sacrificing part of my salary in return for a contribution in to my pension. Apparently this will be tax efficient for me. Are they right?
Kirk Rice LLP answers:
Salary sacrifice schemes can save your employer National Insurance contributions (NICs) and save you both tax and national insurance. The greatest savings result where salary is given up in return for a benefit which is exempt from tax and National Insurance, in which case you will save tax and National Insurance and your employer will save National Insurance. If the benefit received in exchange for the sacrificed salary is taxable, the sacrifice is still worthwhile as you will save National Insurance as most taxable benefits in kind are liable to Class 1A (employer-only) National Insurance contributions rather than to Class 1 which is payable by both you and your employer.
The principle of salary sacrifice is that you give up an element of taxable pay and receives instead a valuable benefit in kind that is not liable to tax or National Insurance.
Examples of circumstances in which the salary sacrifice schemes can be effective include the following.
- Employees incurring childcare costs.
- Company car drivers who incur the London congestion charge.
- Employees who fund their own training costs.
- Employees making pension contributions.
Salary sacrifice schemes are not generally viewed by HMRC as aggressive although all such schemes do need to be properly implemented.
Example
The principles can be illustrated with the following example.
Let’s say you earn £50,000. You will pay tax at 40 per cent and have a marginal NICs rate of two per cent. You enter into a salary sacrifice arrangement under which, for a period of three years, you give up £5,000 of salary each year. Your employer agrees to contribute £5,690 annually to the pension scheme, being the £5,000 plus the associated employer NICs at 13.8 per cent. Over a three year period, your pension fund has received contributions totalling £17,070, with a cost in net salary terms of £8,700. Even if you had made a personal pension contribution, the employer’s annual NICs of £690 and your own NICs of £100 would have been lost. In these terms, the saving over the three year period is £2,370.
If you would like more advice regarding this issue or any other tax matter, please contact us.
If you would like to receive Kirk Rice’s Financial Services Questions or Taxing Times Questions regularly by email, simply email info@kirkrice.co.uk stating Financial Services Questions in the subject heading and we will add you to our distribution list.
Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.
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