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Does salary sacrifice affect tax — and is it worth it?

Employers become more tax efficient with dividends, expense claims and director loans. Employees, on the other hand, have their own option: a salary sacrifice. This enables you to take a benefit in lieu of a portion of your income, cutting your taxable earnings down. Overall, you can emerge with more gains from your work, even though you’re reducing monthly PAYE wages.

Does salary sacrifice affect tax? Most certainly — and we’re going to explain how it can benefit your earning potential.

Salary sacrifice explained

Essentially, a salary sacrifice scheme trades a percentage of your income for a non-cash benefit. For instance, you might opt for:

  • Larger pension contributions
  • A vehicle for work – like an EV through our salary sacrifice scheme and we offer this on all makes such as Tesla, BMW, Mercedes, Kia, Hyundai and more
  • Car parking coverage
  • Childcare provisions
  • Phones, laptops and other technology
  • Health checks and corporate training

An extensive list of benefits were 100% tax-free until 2017, when the Treasury gave some special tax relief rather than full exemption. Some options under a salary sacrifice scheme are barely taxed at all. Low or zero-emissions vehicles and pension top-ups are just two examples of investments that employers can make on your behalf without HMRC taking a cut or only asking for 2-5%.

The benefits themselves aren’t the only reason why you might sacrifice part of your salary. Crucially, you can bring down the total tax you owe.

If you’re hovering on the line between Basic and Higher Rate tax, or the Higher and Additional Rate, then a salary sacrifice can keep you within the lower limit.

For instance, anyone earning £52,000 a year can decide to lease an electric vehicle for, say, around £350 a month via their employer’s EV scheme. This not only reduces the cost versus what you’d pay for a personal lease (as benefits-in-kind carry savings such as zero VAT), but also brings direct income down to £47,800. Therefore, you’d be in the Basic bracket, only paying 20% on what you earn.

Likewise, your Class 1 NI contributions will drop with a smaller PAYE wage. Under 2023/24 rules, you don’t pay NI on up to £242 weekly earnings. You’re then liable for 2-12% on anything more. Even modest sacrifices to your wage packet can make a difference in the long run for the cash you’re able to keep.

Since part of your tax code (the numbers) stand for the amount you earn annually in an income stream, it will change when your salary falls. Otherwise, the code will remain the same — unless you’re moving from one income threshold to another on a second job that doesn’t count for any Personal Allowance.

Potentially. It depends which benefits you might want to take in the future. Some are based on the amount of National Insurance you contribute, which under a salary sacrifice arrangement, will of course be lower than those associated with your typical, full wage.

Here are several examples of tax credits you may be less entitled to:

  • A state pension
  • Statutory maternity pay
  • Bereavement benefits
  • Contribution-based Job Seeker’s Allowance (JSA)

So, how does salary sacrifice affect tax? With careful planning, it can raise your earning potential, freeing more cash for investments that improve your work and personal life. Electric vehicles are a great way to reap the rewards of a salary sacrifice scheme. Learn more to get started on the road to smart tax efficiency.

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