Home > Employee Benefit Basics > The 'Salary Sacrifice' Concept

The 'Salary Sacrifice' Concept

By: J.A.J Aaronson - Updated: 16 Jul 2010 | comments*Discuss
 
The 'salary Sacrifice' Concept

An employee benefit scheme can be a useful tool for both employer and employee. In addition to a regular salary, a benefit scheme allows the employer to further encourage the employee to join the company, and to remain there for as long as possible. From an employee’s point of view, however, a benefit scheme is something to be exploited to the greatest degree possible. The tax treatment of benefits means that employees should be thinking very hard about the types of benefit that they are accepting – particularly when they are giving up part of their pay through ‘salary sacrifice’.

Basic Principles

The concept of salary sacrifice is fairly self-explanatory. Essentially, a salary sacrifice is said to have occurred when an employee chooses not to take a certain proportion of their company salary. Generally, this choice is made in return for the receipt of some sort of non-cash benefit from the employer. Clearly, therefore, it is important that, as an employee, you are confident that you are getting the best possible deal from any salary sacrifice arrangement. This is particularly true when it is considered that entering into a salary sacrifice arrangement permanently alters the terms of your contract of employment. This means that, once you agree to an arrangement of this sort, your company has no obligation to grant you the sacrificed portion of your salary in the future.

Salary sacrifice is a particularly popular choice amongst employers, as it minimises the costs of establishing an employee benefit scheme. The cost of providing benefits is offset against the lower payroll costs, and there are frequently, tax savings to be made. However, salary sacrifice is not necessarily the best choice for an employee, particularly when this type of arrangement is entered into in return for core or non-flexible benefits. In these cases, the employee may well end up sacrificing a portion of their salary in exchange for a benefit for which they have no use. On the other hand, salary sacrifice may well be a sensible option when the benefits being offered are flexible. In these cases, the non-cash benefit may be of more use than the portion of the salary being sacrificed.

Tax Treatment

As well as the contractual aspect of salary sacrifice, it is also important to consider the tax implications. In the first instance, it should be remembered that a salary sacrifice arrangement is only deemed to have been entered into when the Inland Revenue is satisfied that a proportion of the remuneration has been given up. In this way, arrangements whereby the employee requests that the company disperse a part of their cash salary on their behalf (for example, if the company makes use of a trade discount on behalf of the employee by redirecting a part of their salary) are not treated as salary sacrifice.

Clearly, there are significant implications for anyone who enters into a salary sacrifice arrangement, and it is therefore highly recommended that you take independent legal and financial advice before agreeing to any such contract. Furthermore, make sure that you fully understand the benefits that you will be receiving in exchange for giving up a portion of your salary.

You might also like...
Share Your Story, Join the Discussion or Seek Advice..
Why not be the first to leave a comment for discussion, ask for advice or share your story...

If you'd like to ask a question one of our experts (workload permitting) or a helpful reader hopefully can help you... We also love comments and interesting stories

Title:
(never shown)
Firstname:
(never shown)
Surname:
(never shown)
Email:
(never shown)
Nickname:
(shown)
Comment:
Validate:
Enter word:
Latest Comments
Further Reading...
Our Most Popular...
Add to my Yahoo!
Add to Google
Stumble this
Add to Twitter
Add To Facebook
RSS feed
You should seek independent professional advice before acting upon any information on the AboutEmployeeBenefits website. Please read our Disclaimer.