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Is salary sacrifice right for you?
By Laura Howard
In financially fraught times, asking your employer to pay you less might seem like shooting yourself in the foot. However, so-called 'salary sacrifice' schemes can actually be an effective way of giving your finances a boost and feathering your nest.
Under the schemes, you can agree to forgo a proportion of your salary that, in turn, is used to provide a non-cash benefit. This benefit could be a contribution to your pension pot, help with childcare or used to cover the cost of anything from a car, bike or bus pass to your daily lunch.
But a salary sacrifice scheme is more than just a savings policy, it has deeper financial benefits too. For example, it follows that if you opt to receive less of a salary, you earn less too. This means that, as the sum you sacrifice is subtracted from pre-taxed income, you do not pay tax or National Insurance on it.
For basic-rate taxpayers, this means paying 31% less tax and NI on the forgone earnings. For higher-rate taxpayers, this saving equates to 41%. Employers also save around 12.8% in employers' NI contributions that they do not pay on this part of your salary - a saving they may pay back to you as well.
Salary sacrifice is most often used as a means of topping up your pension and involves your employer diverting money away from your pay packet and paying it straight into your company pension scheme.
If your employer pays the full 12.8% NI saving back to you, as a higher-rate taxpayer you can expect £1.91 paid into your pension for each £1 of net pay sacrificed, and if you are a basic-rate taxpayer, you'll receive £1.63. If the employer retains all of this 12.8% NI saving - thereby saving 12.8p for each £1 of salary sacrificed - a higher-rate taxpayer can still expect £1.69 paid into their pension for each £1 given up, while basic-rate taxpayers will receive £1.45.
Kinross + Render, a London marketing firm, started offering a salary sacrifice scheme to its staff 15 years ago. Director Siobhan Griffiths explains: "Our chief executive is keen for our employees to have personal pensions early and the salary sacrifice is an incentive to do this - especially as the average age of our staff is around 27, which is the time many people start to think about their future. You can put in any percentage you want - there's no minimum - but the real bonus with our scheme is that, rather than the firm pocketing the 12.8% NI saving, it redirects it into the employee's pension pot, which makes it even more attractive."
Convincing the masses
If you receive bonuses, savvy investors can also make huge savings, by using salary sacrifice to pay the bonus straight into their pension. This is a good way to top up your pension without lowering your basic salary - useful if you're planning to apply for a mortgage as borrowing limits are normally calculated as a multiple of salary.
But while there are plenty of savings to be had by opting into such a salary sacrifice scheme, there are some points you should bear in mind if you're a lower earner. For example, your perceived lower earnings may affect your state pension benefit because of lower contribution levels. You will also have to find out whether it affects other state benefits such as statutory maternity pay and tax credits.
However, your employer should recommend an external adviser with whom you can discuss these more complex points.
Another popular form of salary sacrifice is the 'childcare voucher' scheme. This allows parents to save tax and NI on childcare costs by paying for it out of pre-taxed income.
"The term 'childcare voucher' dates from years ago when physical vouchers were issued through the post to parents," explains Dan Nugent, director of incentive and employee benefits firm p&mm, which provides the childcare voucher service on behalf of companies. "These days, contributions - which under government rules cannot exceed £243 a month or £55 a week - are directed straight into a separate account like a bank account. You can access this to pay for any kind of childcare - from nursery fees to summer school."
According to Childcare Choices, which runs the schemes on behalf of employers, just 2% of working parents are taking advantage of the scheme, despite potential savings of up to £2,390 if both parents receive vouchers.
But there are warnings to heed with this scheme too, says Simon Lake an IFA at Sound Financial Management. "If you're receiving childcare vouchers and are already enrolled in an employer's pension scheme, when receiving a proportion of your salary as a pension contribution, say 8%, you would need to check that the contribution is based on your salary before any sacrifice."
Lesley Fidler, employment consultant at tax advising firm Baker Tiley, adds that parents will also be restricted to registered childminders under the scheme. She warns this "discounts a whole raft of parents who prefer to use a member of their family or a friend they know and trust".
If you are in receipt of child tax credit and/or working tax credit you should also be careful that lowering your salary doesn't affect your entitlement. Bear in mind too that, while these lower earnings may result in more working tax credit, this would be offset by less child tax credit due to lower childcare costs.
'Cycle to Work'
Accounting firm BDO Stoy Hayward has seen a 3% uptake of this scheme compared with the national average of 1%, according to reward manager Jane Richards. "We work exclusively with Halfords, but the range of bikes, including specialist bikes, is very wide. We also refund the VAT to our employees, so the total cost of the bike is around 50% less than if bought with taxed earnings."
Cycle to Work schemes require you to enter into a contractual agreement that means if you leave the firm during the 12 months the remainder of what you owe will be taken from your last salary. Alternatively, the employer can offer to sell you the bike for a 'fair market price'. Bear in mind that the bike is now second-hand, so the value will probably be low if not negligible. More details are available on cyclescheme.co.uk
While this might all sound squeaky clean in environmental, financial and physical terms, there are factors you'll need to think through first, according to Fidler.
"Firstly, to get the tax break, the bike must be used for 'ordinary commuting' rather than to enjoy the sunshine on the tow path on a Saturday - although, of course, usage is impossible to monitor," she says.
"Secondly, when it comes to working in cities with busy traffic, employers are often reluctant to encourage their staff to cycle. Then there are other limiting factors, such as the distance you live from work, where to lock it and whether you can ride a bike in the first place."
Getting the bus to work may be a more realistic option for you - so if your boss subscribes to the 'GreenTravel2Work' scheme you'll be able to buy an annual bus pass through monthly salary sacrifice deductions. "Many people cite cost as a reason for not getting the bus to work - and with annual passes costing up to £900 depending on where you live, this is understandable - but it looks much more appealing on a salary sacrifice scheme," says Nugent, who is introducing the scheme to workplaces including Nottingham City Council.
"A Nottingham city centre bus pass costs £350 a year; without a salary sacrifice scheme that would mean paying £30.17 a month out of taxed wages. But on a salary sacrifice scheme, the net cost is £20.70 a month for a lower-rate taxpayer or £17.80 a month for a higher-rate taxpayer. This is a total saving of £113.60 and £148.40 respectively," he adds.
And as time goes on, so does the list of salary sacrifice schemes. Now employees have access to all kinds of deals, including tax-free mobiles from providers like Flexphone (now owned by Vodafone) and even salary sacrifice canteens. Last year, food giant Nestlé announced that it was to be the first to offer the 'Eat at Work' scheme to its staff, where a slice of your pre-taxed earnings is taken in return for a card which is loaded with credit to buy food. Your lunch is bound to taste better if it's tax-free.
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