I recently paid for a gym subscription through work through a salary sacrifice.
My company pays the annual cost up front and then I pay back around £40 each month from my gross salary. It saves me around £10 off the usual monthly membership fee and I’m insured for a year.
However, I have never used salary sacrifice for anything other than my pension.
Can I buy other things without sacrificing my salary, like a phone or a car? It sounds like I could save a lot of money if they deducted it from my gross pay, instead of my take-home pay.
Job benefits: Salary sacrifice plan generates tax savings for employers and employees
Angharad Carrick from This is Money says: When you enter a workplace, you are usually presented with a list of benefits which will likely include annual leave, pension contributions and season ticket loans.
You will also be offered a salary sacrifice plan, which allows employees to give up part of their gross salary or bonus in exchange for a non-monetary benefit.
Typically, employees tend to make salary swaps on pension contributions because it is more tax efficient.
As the employee sacrifices part of his salary, both the employer and employee pay less in National Insurance contributions, and the employee will also pay less in income tax.
For example, an employee who earns £40,000 a year without benefits and sacrifices £5,000, will receive £35,000 a year but will pay an additional £5,000 into their workplace pension scheme.
However, not everyone can benefit from the salary sacrifice. The rules say you can’t participate in the scheme if it means your salary falls below the national minimum wage.
The scheme can also be used for non-financial benefits, with bicycles and cars being some of the most popular items.
The Cycle to Work program allows employees to purchase a bicycle through their employer, spread the cost over 12 months and realize some tax savings.
A similar system exists for car leasing, payments for which also cover road tax, insurance and breakdown cover.
Other items, such as mobile phones and computers, can also be paid for through salary exchange, but it depends on your employer.
However, there are also exemptions where you may have to pay tax on the items through something called “benefit in kind”.
These are benefits that employees receive that are not part of their salary and some may be subject to taxes. It can be difficult to determine which applies to your circumstances.
We asked some experts for advice on which could use your job’s salary sacrifice plan and which could be subject to tax.
Gym memberships can be included in salary sacrifice plans, but it depends on your employer.
What can I sacrifice salary?
Steve Cave, director of employee benefits at Evelyn Partners, says: It really depends on the company-wide benefits your employer offers, as this will generally limit what you can choose to purchase through a salary sacrifice agreement.
However, if you and your colleagues are interested in having a salary sacrifice arrangement introduced for a particular benefit, then it might be worth contacting your human resources or employee benefits department to express your interest. and ask if it is a possibility.
Salary sacrifice is an agreement between an employer and an employee to change the terms of the employment contract to reduce the employee’s right to receive a cash payment.
The cash entitlement reduction (gross salary) is made in exchange for non-monetary benefits that may include one or more of the following:
- Additional employer pension contributions
- Mobile phones, laptops and other technologies.
The more gross salary is exchanged, the lower the taxable income and the greater the savings made from income tax and national insurance contributions (NICs).
Megan Rimmer, Chartered Financial Planner at Quilter Cheviot, says: It is also worth exploring the protection offers available through salary sacrifice.
You may be able to obtain protection policies such as life insurance, critical illness, income protection, medical and dental cover, among others, through salary sacrifice, which could help you save money compared to purchasing these products elsewhere. places, although it is always worth buying them. around to make sure you are getting the best deal for your circumstances.
Where possible, you should seek professional financial advice to ensure you are making the best possible decisions for your finances, especially if you intend to use salary sacrifice to reduce your tax burden and/or increase your pension.
There are important tolerances and thresholds to consider, so it is best to seek professional support to ensure you make the right decisions.
What are the disadvantages of salary sacrifice?
Angharad Carrick says: While you may be reaping the tax benefits of salary sacrifice, it’s not for everyone.
It may affect your right to receive state benefits and other benefits such as life insurance, bonus payments or commissions.
Steve Cave adds: Salary sacrifice can impact everything related to an employee’s salary. Therefore, there must be a framework (scheme rules and governance) to ensure that potential problems are avoided, and some modern schemes do take such measures.
For example:
- Restrictions for low-income people. Employers cannot use wage sacrifice where doing so would reduce an employee’s earnings below the national minimum wage.
- Salary sacrifice may affect employees’ right to income-related matters, such as loan applications; However, this can usually be resolved as most lenders require seeing payslips.
- Statutory maternity pay is normally calculated based on average weekly earnings, so it could be reduced if your overall salary is reduced.
- Benefits like “death in service” group life insurance and group income protection
If you think you might be affected in any of these areas by a salary reduction, before entering into an SS agreement, contact your human resources or employee benefits staff and check how the plan is administered and whether such issues might arise. .
Karen Barrett, Founder and CEO of Unbiased says: While salary sacrifice is helpful, there are a few things to consider. For example, a reduced salary may affect the amount you can borrow on a mortgage or entitlement to some benefits.
It’s worth checking with your employer how the salary sacrifice will affect your earnings before you sign up.
What is a benefit in kind?
Angharad Carricks says: Salary sacrifice is an agreement to reduce an employee’s right to receive cash payment, usually in exchange for a non-monetary benefit.
However, employers also offer cash benefits without tax savings, even though they are deducted from your gross pay.
These are items or services that are purchased to benefit the employee personally and there is no identifiable business purpose.
For example, you will not have to pay tax or National Insurance on uniforms or protective clothing, but you will have to declare the clothing if it is part of a salary sacrifice arrangement.
The most common types of benefits in kind that are likely to trigger a tax charge are private health insurance, accommodation, loans, non-business costs of travel and entertainment, and the purchase of a vehicle for the business.
It is your employer’s responsibility to report this to HMRC.
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