Financial advisor SCOTT WOODS looks at salary sacrifice in this week’s MONEY MATTERS
A salary or bonus sacrifice involves an employee agreeing to change their terms and conditions of employment relating to pay.
Under their revised employment contract, the employee is entitled to a lower salary or contractual bonus than before, plus a new non-cash benefit from their employer.
Normally, this is done to create tax or National Insurance savings without reducing the overall value of an individual’s benefit package.
Generally, the term salary sacrifice was mainly used to refer to the situation where an employee gave up the right to some of their salary in return for employer contributions into a pension scheme.
But with flexible benefit packages becoming increasingly popular, the term is now commonly used to describe any situation where an employee takes a cut in salary in return for a benefit in kind.
Although there are often good reasons for using salary or bonus sacrifice, there can be serious drawbacks in some cases. Anyone considering it should weigh up the potential implications before going ahead.
If there’s not a contractual right to the bonus, HMRC doesn’t view this as a sacrifice. So, there’s no need for an exchange of letters between employer and employee. Tax relief on the contribution can be claimed as a business expense in the same way as any employer contribution and it’ll be assessed by the local Inspector of Taxes.
To be a valid salary or bonus sacrifice arrangement for additional pension rights, the employee’s terms and conditions of employment must be changed to reduce their salary or bonus in return for the pension contributions; and the employee’s right to the higher salary or bonus must be given up before it’s treated as received for income tax or NI purposes.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.