Ten years or so ago a salary sacrifice arrangement was considered a director’s perk, however, these days this is no longer the case. Salary sacrifice schemes are increasingly offered by employers as a way to itigate tax pressures and allow employees more flexibility in how they choose to receive their remuneration.
Under salary sacrifice arrangements, you trade part of your salary for benefits such as pension contributions. Having part of a salary or bonus paid into a pension scheme has particular tax advantages.
For example, if you sacrifice £100 of gross salary every month and have this paid into your pension scheme, you save tax at your marginal rate plus national insurance (NI) contributions. Salary sacrifice will also benefit the employer, who saves its own NI contributions and, in some cases, may even rebate this back to the employee.
Employees must be careful not to commit to a salary cut they cannot sustain. Also, pensions tie up contributions until at least the age of 55, which other investments do not. Salary reductions may also have knock-on effects for other assets – for example, mortgage applications, and care needs to taken so that death-in-service benefits are not affected. Finally, you need to ensure your employer’s pension merits an additional investment. If the scheme is weak or inflexible, it may not be worth it.