Salary Sacrifice: A Tax-Efficient Way to Boost Your Take-Home Pay

With recent increases in National Insurance (NI) contributions, salary sacrifice schemes have become even more tax-efficient, helping employees maximise their take-home pay while employers reduce their payroll costs. So let’s take a look at them in a bit more detail.

What Is Salary Sacrifice?

Salary sacrifice is a smart financial strategy that allows employees to exchange part of their pre-tax salary for non-cash benefits. Since this reduces their gross earnings, both the employee and employer pay less in tax and National Insurance.

For example, if an employee earns £40,000 per year and sacrifices £5,000 into their pension, their taxable income is reduced to £35,000. This lowers their tax and NI liability while boosting their pension savings.

Common benefits that can be included in a salary sacrifice arrangement include:

• Pension contributions

• Childcare vouchers (for those already in the scheme)

• Cycle-to-work schemes

• Electric car leasing

• Workplace parking

While some benefits, like health insurance, can still be offered, not all salary sacrifice schemes are tax-efficient. Pension contributions, however, remain one of the most attractive options.

Why Salary Sacrifice Is Beneficial

Increased Take-Home Pay

By reducing taxable earnings, employees pay less Income Tax and NI, meaning they take home more money than they would if they contributed to a pension via a traditional post-tax contribution.

Enhanced Pension Savings

With salary sacrifice, more money goes into an employee’s pension rather than being lost to tax. This allows for faster pension growth, helping employees secure a better retirement.

Tax Efficiency in Light of National Insurance Increases

Recent rises in National Insurance contributions have made salary sacrifice even more attractive. Since salary sacrifice reduces an employee’s taxable earnings, it directly lowers their NI payments. For higher earners, this can result in significant savings, making it an excellent way to offset rising tax burdens.

Example: Salary Sacrifice vs. Standard Pension Contribution

With Salary Sacrifice:

• New gross salary: £38,000 (after sacrificing £2,000)

• Employee NI savings: £240 (12% of £2,000)

• Employer NI savings: £276 (13.8% of £2,000)

• Net salary after tax & NI: £29,022

• Total cost to employer: £45,244 (saving £276, which could be reinvested into the pension)

By using salary sacrifice, the employee keeps an extra £240 in take-home pay, and the employer saves money, which could be reinvested into the pension.

Things to Consider Before Opting for Salary Sacrifice

While salary sacrifice offers great benefits, there are a few things to keep in mind:
Impact on State Benefits: Since it reduces gross salary, it may affect maternity pay, statutory sick pay, and future state pension entitlements.

Mortgage and Loan Applications: Some lenders assess affordability based on gross salary, so a lower reported salary might impact borrowing capacity.

Minimum Wage Rules: Employees earning close to the National Minimum Wage may not be eligible for salary sacrifice schemes, as their adjusted salary must remain above the threshold.

Summary

Salary sacrifice is a tax-efficient way to boost take-home pay, particularly when used for pension contributions. With rising National Insurance rates, the savings have become even more significant, making it a valuable tool for employees looking to maximize their earnings and employers seeking to reduce payroll costs.

If you're interested in salary sacrifice, speak to your HR or payroll team to see how you can benefit from this scheme.