Salary sacrifice scheme is a scheme in which an agreement to exchange part of your salary as an employee to enable you get extra benefits from your employer, benefits like child care vouchers, company care or additional pension contributions. Basically you give part of your salary in exchange for a non-cash benefit. Agreeing to a salary sacrifice results in overall low pay, you pay less tax and National Insurance. Your employer will not have to pay their contributions on the part of your sacrifice. Sacrificing part of your salary means less pay for things like maternity pay or mortgage applications, this also affects your state pension or other contribution based benefits. Some examples of salary sacrifice benefits include, company cars, childcare vouchers, proximity to workplace car parking all their benefits could be tax-free.
The salary sacrifice scheme requires an employee to give up a certain part of their salary for benefits that are availed to them. The employer on the other hand increases its contribution to the pension or benefits it provides to the employee. This program enables the employer and his employee to enjoy tax savings from the government. When the employer reduces the total pay of the employee, the National insurance, which is based on the total amount of contribution, is also reduced. Income tax may also be reduced depending on the flexibility of the benefit.
A salary sacrifice scheme cannot reduce an employee’s cash earnings below the national minimum wage rates. Employers must alter their contract with changes especially when an employee decides to opt in or out of the scheme. The employer must indicate in the contract clearly what the cash or non-cash entitlements are at any time. Salary sacrifice scheme can make provisions for either to opt in or out of the scheme in the event of lifestyle changes such as marriage, divorce or pregnancy. The employer’s key responsibility is to make sure that they pay and make the right amount of deductions of tax and NICs for the provision of the cash and benefits they provide.
The childcare voucher scheme is a common type of salary sacrifice scheme especially for those parents who are working. It can help them save up on child related products and services. The voucher scheme is also common among employees; the employer is entitled to certain vouchers, which he can use then redeem. Since these vouchers are tax free, they benefit both the employer and the employee. Higher earners should proceed with caution where salary sacrifice scheme is used to accrue additional pension despite the tax advantages it offers. The schemes are under employment laws, it is important for both employer and employee to seek legal counsel to ensure the plan with not affect or reduce the benefits that the might get from the government. Some employers do not handle the salary sacrifice scheme in-house, they outsource the scheme to companies who are specialize in handling these schemes for both parties.
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