What is salary sacrifice?

Salary sacrifice is an employment arrangement in which an employee agrees to give up a portion of their salary or wages in exchange for non-cash benefits provided by the employer. These benefits can include items like a company car, additional vacation days, contributions to a retirement savings plan, or other perks.

How does salary sacrifice work?

To implement a salary sacrifice, both the employer and the employee must agree on the specific amount of salary to be exchanged for a particular benefit. The employee typically signs a salary sacrifice agreement outlining the terms. The employer then deducts the agreed-upon amount from the employee's salary and uses it to provide the chosen benefit.

Does salary sacrifice reduce an employee's taxable income?

Yes, salary sacrifice reduces an employee's taxable income. When an employee chooses to exchange part of their salary for a non-cash benefit, the sacrificed portion is not subject to income tax. This reduction in taxable income can result in lower income tax liability for the employee.

Can salary sacrifice lower an employer's payroll taxes?

Yes, salary sacrifice can reduce an employer's payroll taxes. Payroll taxes, such as Social Security, Medicare (in the U.S.), or national insurance (in the U.K.), are often calculated based on a percentage of an employee's salary. When employees opt for salary sacrifice, their taxable income decreases, which can lead to lower payroll taxes for the employer.

What are the common salary sacrifice schemes?

Common salary sacrifice benefits include:

• Pension contributions
• Health insurance
• Childcare assistance
• Transportation benefits (car or public transportation expenses)
• Extra vacation days
• Gym memberships
• Mobile phone or internet subscriptions
• Professional development courses

Is there a limit to the amount of salary that can be sacrificed?

Yes, there are limits to the amount of salary that can be sacrificed, and these limits vary depending on the specific benefit and the country's tax regulations. For example, contribution limits may apply to pension schemes. In the U.S., there are annual limits for contributions to retirement plans like 401(k)s.

Can salary sacrifice affect employees' eligibility for government benefits?

Yes, participating in a salary sacrifice scheme can impact an employee's eligibility for certain government benefits. By reducing their taxable income, employees may become ineligible for some government benefits that are income-based. For instance, sacrificing part of their salary for a pension contribution may affect their eligibility for government-provided pensions or other benefits.