I recently paid for a gym subscription through work via salary sacrifice.
My company pays the annual cost upfront and I then pay back around £40 each month from my gross pay. It saves me about £10 off the usual monthly membership fee and I’m locked in for a year.
However, I haven’t ever used salary sacrifice for anything other than for my pension.
Can I buy other things through salary sacrifice like a phone or a car? It seems like it could save me a lot of money if it’s taken from my gross pay, rather than take-home pay.
Work perks: The salary sacrifice scheme creates tax savings for employers and employees
Angharad Carrick of This Is Money says: When you join a workplace, you’re 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 scheme, which allows employees to give up part of their gross salary or bonus in exchange for a non-cash benefit.
Typically employees tend to do salary exchange on pension contributions because it is more tax efficient.
As the employee is sacrificing part of their salary, both employer and employee pay less in National Insurance contributions, and the employee will also pay less in income tax.
For example, an employee earning £40,000 a year with no benefits and sacrifices £5,000, will be paid £35,000 a year but pay an additional £5,000 to their workplace pension scheme.
Not everyone can qualify for salary sacrifice, though. The rules say that you can’t do the scheme if it means your salary falls below the National Minimum Wage.
The scheme can also be used for non-financial benefits, with bikes and cars among the most popular items.
The Cycle to Work scheme allows employees to buy a bike through their employer, spread the cost over 12 months and make some tax savings.
There is a similar scheme for car leasing, with payments also covering road tax, insurance and breakdown cover.
Other items, like 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 might have to pay tax on the items through something called ‘benefit in kind’.
These are benefits that employees receive that aren’t part of their salary and some can be taxed. It can be difficult to work out which apply to your circumstances.
We asked some experts for their advice on what you could use your work’s salary sacrifice scheme, and which might be liable for tax.
Gym memberships can be included in salary sacrifice schemes but it depends on your employer
What can I salary sacrifice?
Steve Cave, Employee Benefits Director at Evelyn Partners, says: It really depends on the company-wide benefits that your employer offers, as this will generally limit what you can choose to purchase via a salary sacrifice arrangement.
However, if you and your colleagues are keen to see a salary sacrifice arrangement for a particular benefit introduced, then it could be worth contacting your HR or employee benefits department to express an interest and enquire 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 entitlement to cash pay.
The reduction of cash entitlement (gross salary) is made in return for non-cash benefits which may include one or more of the following:
- Additional employer pension contributions
- Mobile phones, laptops, and other technology
The more gross salary exchanged, the lower the taxable income and the higher the savings realised from income tax and National Insurance Contributions (NICs).
Megan Rimmer, chartered financial planner at Quilter Cheviot, says: It is also worth exploring the protection offerings available via salary sacrifice.
You may be able to get protection policies such as life assurance, critical illness, income protection, health, and dental cover, among others, via salary sacrifice which could help you save money compared to purchasing these products elsewhere, though it is always worth shopping around to ensure you are getting the best deal for your circumstances.
Wherever possible, you should seek professional financial advice to ensure you are making the best possible choices for your finances, particularly if you intend to use salary sacrifice to lower your tax burden and/or top up your pension.
There are important allowances and thresholds to keep in mind, 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 might be reaping the tax advantages of salary sacrifice, it’s not for everyone.
It may affect your entitlement to state benefits and other benefits like life insurance, bonus or commission payments.
Steve Cave adds: Salary sacrifice can have an impact on anything that is linked to an employee’s salary. Therefore, there must be a framework (scheme rules and governance) to ensure potential issues are avoided, and some modern schemes do take such steps.
For example:
- Restrictions on low-income earners. Employers aren’t able to use salary sacrifice when it would reduce an employee’s earnings under the national minimum wage.
- Salary sacrifice can affect employees’ entitlement to earnings-related matters such as loan applications; however, typically this can be resolved as most lenders require sight of payslips.
- Typically statutory maternity pay is calculated based on average weekly earnings so it could be reduced if your overall salary is reduced.
- Benefits like group ‘death in service’ life insurance and group income protection
If you think you could be affected in any of these areas by a reduction in salary, then before you enter into an SS arrangement contact your HR or employee benefits people and check how the scheme is run, and whether such issues could arise.
Karen Barrett, founder and CEO of Unbiased says: While salary sacrifice is useful, there are a few things to consider. For example, a reduced salary may impact how much you can borrow with a mortgage or entitlement to some benefits.
It’s worth checking with your employer how salary sacrifice will impact your earnings before signing up.
What is a benefit in kind?
Angharad Carricks says: Salary sacrifice is an agreement to reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit.
However, employers also offer cash benefits with no tax savings, despite it being taken out of 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 and National Insurance on uniforms or protective clothing but you will have to report the clothing if it’s part of a salary sacrifice arrangement.
The most common types of benefit in kind that are likely to incur a tax charge are private medical insurance, accommodation, loans, non-business costs for travel and entertainment, and a vehicle purchased for the business.
It is the responsibility of your employer to report this to HMRC.
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