What is salary sacrifice?

Posted on December 21, 2010

Salary sacrifice is a rather dramatic-sounding term that refers to an arrangement between employer and employee whereby the employee gives up a certain proportion of their salary for benefits of equal monetary value. In many cases, the money ‘sacrificed’ is used as an extra contribution to the employee’s private pension.

Where this is the case, the money removed from the current pay packet is paid directly into a private pension fund for the employee’s later benefit. It can prove a highly efficient way of saving for a pension, and if handled correctly, can reduce tax and National Insurance Contributions obligations, as the employee receives a lower take-home pay.

Employers can also save on their NICs; the amount they will continue to pay is defined in the contract outlining the conditions of salary sacrifice. It can be anywhere between 0% and 100%, with most employers paying around 50% into the retirement pension.

Salary sacrifice is not suitable for everyone, and the ramifications need to be explored in depth before an employee commits to giving up some of their salary. Sacrificing part of an agreed pay packet can affect the employee’s entitlement to other benefits, including statutory rights if the measure brings take-home pay below the Lower Earnings Level (LEL) of £5,044 pa (2010/2011).

Salary sacrifice can also affect life insurance policies and mortgages, as these will be judged on the amount of take home pay, and not the total salary you are entitled to. This means the amount of cover provided, or money lent, can be significantly reduced if you participate in salary sacrifice. If in doubt, a discussion with a financial advisor will help you decide if salary sacrifice is right for you.