Today’s payroll post is discussing Salary Sacrifice. Salary sacrifice is an agreed reduction in salary with an employer in exchange for a benefit. The reduction in salary provides the employee with a tax and national insurance benefit.
How does it work?
You sign up for certain benefits such as a salary sacrifice pension scheme, a give as you earn scheme, cycle to work scheme, childcare vouchers etc depending on what your work place offers.
What happens next?
Once this is processed and reaches the payroll department, whatever the value of the benefit is, this is deducted from your gross pay thus reducing your taxable pay i.e you pay less tax and less national insurance on the remainder of your pay!
If your monthly salary is £1,000 and you are in a salary sacrifice pension scheme contributing £200 per month.
£1,000 – £200 = £800
£800 then becomes your new gross taxable pay for where Tax and National Insurance are then applied. Instead of being taxed on £1000 you are taxed on £800 and there is your saving!
Always remember to check with your individual HR/Benefits team to find out about your work schemes. They may not all be salary sacrifice schemes so it’s good to know before you opt in.
If you want to read up on this more I’ve left a link below for HMRC’s explanation.
Until next time..