Salary Sacrifice

It is fairly common for employers to give their employees benefits in addition to their salary, such as childcare and pension contributions.

Salary sacrifice enables you to exchange part of your salary for a non-cash benefit, such as bikes, childcare vouchers, mobile phones and, in certain areas, bus passes. 

Salary sacrifice and bikes

This is very straight forward, your employer purchases the bike and then leases it to you. Your salary is then reduced by the net cost of the bike for the payment period.
 
So how does this help? Its simple, as your salary is reduced, tax and NI are also reduced. After the hire period ends, the employer may agree to sell the bike to the employee at a 'fair market value' i.e. what a second-hand bike of that make and condition would be worth if sold on the open market.

Example of how it works

You earn £20,000 a year during tax year 2011-12. Payment period is set at 12 months, but total hire period is set at 36 months - but the employee pays only for 1 year:
 
Monthly take-home pay after tax and NI: £
 
Full cost of bike: £500 plus VAT of £: £
 
Your employer purchases bike and reclaims VAT
 
VAT saving passed to to you, so your salary sacrificed is: £
 
Your salary is therefore  reduced to £   for 12 months
 
Your monthly pay after tax and NI on £ = £
 
Difference in monthly pay for 12 months = £
 
After 36 months you buy the bike at fair market value plus VAT
 
On an £ bike this is now 12% of purchase price plus VAT = £
 
Total cost of bike
Difference in take-home pay for 12 months: £
Fair market value price of bike + VAT: £
Actual cost of bike to employee: £
Saving on the full cost of the bike (£   ): £
 
 

Childcare vouchers and salary sacrifice

You  can receive up to £55 a week or £243 a month in childcare vouchers, free of tax and NI. The amount is restricted for higher rate (40%) taxpayers - the maximum they can receive tax-free is £28 a week. Additional rate (50%) taxpayers are limited to £22 a week. 
 
Under this scheme you receive the same salary as normal, but part of it is paid to you as tax-free childcare vouchers, which you pass on to your childcare provider. 
 

Example of how it works

You earn £20,000 a year in 2011-2012 and claiming the maximum childcare vouchers of £243 a month:
 
Tax and NI paid on salary of £3 during tax year = £
 
Tax and NI paid on salary of £20,000 where max of £243 a month (£    a year) is paid in childcare vouchers: £
 
Saving over the tax year: £
 

Increasing your pension with salary sacrifice

You can increase what you pay into your pension and both you and your employer can save on NI by giving up part of your salary and directing it to your pension instead. 
 

Example of how it works

You earn £20,000 during 2011-12 where both employee and employer pay 3% of salary into a group personal pension scheme (GPP). The employer cuts the amount paid in salary by £1,000 but makes a corresponding additional contribution to the employee's pension fund.
 
Before salary sacrifice
Employee contribution: 3% of £20,000 (£ plus tax relief) = £
Employer contribution: 3% of £20,000 = £
Total contribution = £
 
After salary sacrifice
Employee contribution: 3% of £20,000 (£   plus tax relief) = £
Employer contribution: 3% of £20,000 plus £1,000 from salary sacrifice = £
Total contribution = £
 
Increase to pension contribution because of salary sacrifice = £

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