How salary sacrifice schemes can ease cost-of-living pressures

We ask Jonathan Watts-Lay, Director, WEALTH at work, about the main benefits of salary sacrifice schemes

With many employees forced to tighten their belts during the cost-of-living crisis, salary sacrifice schemes are a useful benefit organisations can offer employees to help them cut costs.

Jonathan Watts-Lay, director, WEALTH at work, says: “One way to save money is by paying for things through your company payroll using your pre-tax salary, so you pay less income tax and National Insurance. This is known as salary sacrifice and can offer employees significant savings.”

Through such a scheme, higher rate tax payers can save 40% in income tax and 2% in National Insurance, while those on basic rate save 20% in income tax and 12% in National Insurance.

Not just for pensions

Watts-Lay continues: “Many people pay their pension contributions in this way, but it can also be used to pay for transport such as company cars, bikes and bus passes, and even mobile phones, gym passes and health and dental care.”

But he warns that many benefits such as mobile phones and company cars are now seen by the tax man as ‘Benefits in Kind’ and while savings can still be made, many now carry high tax charges.

“Tax-free benefits, however, are still available on employer provided pension savings and pensions advice, certain types of employee share plans, and cycle to work schemes,” he says.

“Childcare vouchers and contracted childcare can also be paid for via salary sacrifice, although these arrangements are closed to new applicants.”

Watts-Lay says that for those looking for a new car, salary sacrifice is one of the most cost-effective ways to drive an electric vehicle (EV), as the Benefit in Kind value applied to EVs is currently 2%.

“This means the income tax and National Insurance saving outweigh this relatively small Benefit in Kind cost, whereas the cost for drivers of petrol and diesel and cars can be up to 37%.”