Date posted: 17th Oct 2023
Salary sacrifice is an arrangement whereby an employee reduces their salary in return for another form of benefit.
The reduction in salary will mean less tax and national insurance payable and should the benefit granted instead, have a tax free status, then the employee may see a reduction in their overall tax liability.
The main examples of salary sacrifice are reducing salary in exchange for:
- Employer pension contributions.
- Childcare vouchers.
- Provision of a low emission car.
- Provision of a bicycle.
There are some practical issues to consider, such as:
- The employee needs to be aware that they have reduced their income, which can impact them if they are looking to borrow money to buy a house for example. The employee may also have a lower salary for calculating statutory pay such as maternity and sick pay.
- The employer needs to ensure that they have not breached national minimum wage regulations.
- In addition, if the employer allows the employee to choose a company car, the employer may have to continue to fund a company car (on a lease, HP etc) if the employee leaves.
Care needs to be taken when an employee has the option of a car allowance or the provision of a non-low emission company car. The employee may still end up paying tax on the amount of car allowance instead of the company car.
We have also seen instances of personal costs being “reimbursed” to employees via employer loans that are then repaid out of pre-tax income i.e. ala salary sacrifice. This falls foul of the legislation and will be counteracted by HMRC.