In July, one of our monthly spotlights focuses on salary sacrifice schemes, their benefits, what to consider and how these are changing in the coming years. Below focuses on the highlights, but you can find the whole report here.
Salary sacrifice refers to an agreement with your employer to reduce your gross pay in return for a non-cash benefit. From a tax perspective, we more specifically focus on salary sacrifice schemes whereby income is sacrificed to increase employer contributions to pension schemes, as a method for reducing the gross income subject to income tax and employee national insurance.
This can be particularly beneficial if you earn a gross income between £100,000 and £125,145, owing to the cumulative effect of the 40% income tax band and decaying personal allowance resulting in an effective tax rate of 60%. It is important to note that, whilst this can decrease the amount of tax paid, net income will still be lower, due to the salary being sacrificed into the scheme.
The proposed changes being introduced from April 2029 focus on limiting the national insurance, both employer and employee, available. NI relief will only be available on the first £2,000 sacrificed into the scheme. This will not impact the income tax relief available.
Before entering into these schemes, there are some important factors to consider:
- Salary sacrifice results in a decreased take-home pay. In addition to reduced regular income, this can also reduce statutory sick pay, maternity pay and other calculations which are based on income post sacrifice.
- State-pensions still require minimum NI contributions, which significant sacrifice could reduce below this threshold
- Salary sacrifice cannot bring hourly wage below the national minimum, restricting how much can be sacrificed.
When deciding how much to sacrifice:
- Are you close to a key income tax threshold?
- If you are a high earner, could this reduce below the threshold for high-income child benefit charge?
- Have you got remaining annual pension allowance?
Salary sacrifice schemes can expand far beyond those for pension contributions, including workplace nursery places, electric cars and additional annual leave. Check with your employer which schemes they offer.
