Salary sacrifice, also known as salary exchange, is an arrangement where you agree to forgo part of your salary in return for benefits of a similar financial value.

In this article, we are going to take a closer look into what salary sacrifice schemes are and how they can let you pay less for income tax and national insurance contributions. Essentially, you take home a lower salary, but the benefits can make it totally worth it. We will look at salary sacrifice for employees and the advantages and disadvantages of opting in for salary sacrifice deduction.

The way salary sacrifice works depends on the type of benefit you’re opting for. For example, if you’re opting for a pension scheme, the money you sacrifice from your salary will be paid into your pension pot before income tax is deducted. This means you’ll pay less income tax and National Insurance.

If you’re opting for a different type of benefit, such as childcare vouchers, you’ll usually make the payment from your salary after income tax and National Insurance has been deducted. This means you won’t get the same tax relief as you would with a pension, but you will still pay less tax overall.

The main benefit of salary sacrifice is that it can save you money on income tax and National Insurance. For example, if you’re a basic rate taxpayer and you opt for a salary sacrifice scheme to pay for childcare, you’ll save 12% on the cost of your childcare.

Salary sacrifice can also be a good way to boost your pension pot if you’re a basic rate taxpayer, as you’ll get 20% tax relief on the amount you sacrifice from your salary. Higher and additional rate taxpayers will get 40% and 45% tax relief, respectively.

Sometimes your employer can make employer contributions towards a salary sacrifice scheme as well. Often, a workplace pension scheme will have some payments made by your employee.

One of the main disadvantages of salary sacrifice is that it can reduce your take-home pay. This means you might have to budget carefully to make sure you can still afford your monthly outgoings.

Another disadvantage is that salary sacrifice schemes are usually only available if you’re employed. This means self-employed workers and those on zero-hour contracts miss out.

It’s also important to be aware that salary sacrifice schemes are not always permanent. This means your employer could cancel the scheme at any time, which could leave you worse off financially.

A salary sacrifice car scheme or the more popular EV salary sacrifice scheme is a type of employee benefit that allows you to lease a new car from your employer in return for sacrificing part of your salary. Essentially, it is the same as the other salary sacrifice schemes we have discussed in this article; however, you get a company car as a benefit. Instead of paying a big outward payment, instead, you sacrifice a part of your salary.

As we mentioned, you save money on your tax and national insurance contributions. This is the main benefit of a salary sacrifice arrangement which is great, do you still have doubts about whether salary sacrifice is worth it?

Other car finance schemes, such as personal contract purchase (PCP) and hire purchase (HP), do not offer the same tax benefits as salary sacrifice schemes. This is because you’re still responsible for paying income tax and National Insurance on your salary, even if you’re making monthly payments towards a car.

With a salary sacrifice scheme, you’re effectively paying for your car with after-tax money. This means you can save money on income tax and National Insurance, as well as potentially reduce your monthly payments.

The amount you can save with a salary sacrifice car scheme will depend on your individual circumstances. However, as a general rule, you can expect to save around 20-30% on the cost of your car compared to other financing methods.