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ACCA

Salary Sacrifice - A Tax Free Benefit for Employees

Surprisingly enough, it is possible to receive some remuneration from your employer without paying tax or national insurance (NI). Such arrangements go under the general name of Salary Sacrifice.

What is Salary Sacrifice?

A salary sacrifice involves the employee agreeing with the employer to receive reduced cash remuneration in return for an alternative non-cash remuneration, such as a contribution (or increased contribution) to the employee's pension.

For example, an employee earning £24,000 pa agrees with their employer to receive £21,140 salary, and a pension contribution of £100 per month. The reduced salary will be subject to tax and NI in the normal way, but the pension contribution will be free of tax and NI.

Without salary sacrifice With salary sacrifice £100 pm
Paid as salary 24,000 22,800
Personal allowance 6,475 6,475
Tax at 20% 3,505 3,265
National Insurance 2,011 1,879
Employee receives 18,484 17,656
Pension contribution 0 1.200
Total net remuneration 18,484 18,856

It is true that if the employee makes pension contributions out of take home pay, the contribution will be grossed up by the relevant amount of income tax; however, this does not apply to National Insurance.

The employer also benefits as no employer's NI is due on the pension contribution. The employer therefore saves £395 in the example. Perhaps your employer will be generous enough to share this with you!

There are two vital conditions for salary sacrifice arrangements to be effective: Some points for employers to consider: Some points for employees to consider:

Effect on state benefits

There are various earning thresholds for qualification for benefits such as Statutory Maternity Pay, Statutory Sick Pay, and so on. Generally, if earnings remain above the Lower Earnings Limit of £109 per week (2013-14) there will be no effect on benefit entitlement.

How do we implement a salary sacrifice?

The terms and conditions of the employment contract are varied in accordance with the agreement reached with the employer. This can be done by letter, signed by both parties.

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