What Is Salary Sacrifice and Why Do People Do It? #AskAMS

‘Salary Sacrifice’ is a mechanism where a formal agreement is made jointly by an employer and employee, to reduce an employee’s salary in return for some other benefit. The point of this arrangement is generally to save National Insurance – and this saving can then be divided between the employer and the employee.

How to do it

Firstly, one needs to seek professional advice from a Financial Advisor - as any salary sacrifice must be carefully set up in order to achieve its aims, and be safe from any HMRC challenge that the sacrifice isn’t genuine.

How savings can be made by sacrificing National Insurance

Pension contributions

Example: an employee can agree to sacrifice £100/month of their gross salary in return for the employer paying an extra amount into the employee’s pension fund. The National Insurance saved would typically be £25.80 (12% for the Employee and 13.8% for the Employer).  The sum saved is £25.80.  Added to the sacrificed £100, it can be invested into the pension fund.

Comparison: if the employee made a personal contribution into their pension fund without the salary sacrifice, there would be £25.80 less in the fund.  So, there is potentially a big advantage (25.8% of the sacrificed amount) for many employees.

Private health insurance (and other taxable benefits in kind)

Salary can be sacrificed and the employer can pay the premiums.  National Insurance would still be payable by the employer, but the Employee’s National Insurance (at 12%) is saved.

Childcare vouchers

An employer offering childcare vouchers can agree a salary sacrifice arrangement which saves an employee income tax, as well as National Insurance - so it’s possibly worth 32% (of the value of the vouchers) to the employee; and 13.8% to the employer.