Previously a director’s perk, salary sacrifice schemes  are increasingly offered by employers as a way to mitigate tax pressures and allow employees more flexibility in how they choose to receive their remuneration. Under such arrangements, you can trade part of your salary for benefits, such as pension contributions or even childcare vouchers.

Having part of a salary or bonus paid into a pension scheme has particular tax advantages. If you sacrifice, for example, £100 of gross salary every month and have this paid into your pension scheme, you save tax at your marginal rate plus national insurance (NI) contributions. Salary sacrifice will also benefit the employer, who saves its own NI contributions – and, in rare cases, may even rebate this back to the employee.

The maths for investing in pensions is compelling. Higher-rate taxpayers would get £100 of investment at a net cost of just £59, while lower-rate taxpayers would get the same for just £69. Salary sacrifice might also prove tax efficient for other benefits, because employees receive some at the gross value (subject to the rules over benefits in kind).

However, employees must be careful not commit to a salary cut they cannot sustain. Pensions tie up your contributions until at least the age of 55, which other investments do not. Salary reductions will also have knock-on effects for other assets – for example, mortgage applications, death-in-service benefits and income protection. Finally, you need to ensure your employer’s pension merits an additional investment. If the scheme is weak or inflexible, it may not be worth it.

NOVEMBER 2012