Salary sacrifice. It’s not a particularly appealing phrase. After all, we don’t really go in for sacrifice nowadays; it seems a bit too Old Testament for our liking. And, even if we did, who would want to sacrifice their salary? It’s hard-earned, which makes it hard to part with. Because of this, some prefer to use the term ‘salary exchange’, but they’re exactly the same thing.
The benefits of salary sacrifice
Wording aside, salary sacrifice is an extremely appealing concept. It’s actually about allowing people to keep more of their income. The idea is that an employee gives up some portion of his or her salary in exchange for other benefits from their employer. These benefits could be relatively small, such as a gym membership, or they could be relatively large, such as a car. The common denominator is that the employee simply doesn’t pay Income Tax and National Insurance on the salary they forgo, yet receive something that they would have spent money on anyway. It’s worth noting a Benefit in Kind (BIK) tax is applicable for some benefits paid for through salary sacrifice. This is the case for cars purchased through salary sacrifice, however the amount varies depending on the vehicle’s price and CO2 emissions.
The growing popularity of salary sacrifice
These schemes have been around for years. In some countries, they’ve even become a business unto themselves. Australia has an entire network of companies that specialise in ‘salary packaging’; which is to say, organising employees’ salaries to achieve an optimum blend of taxable cash and non-taxable benefits.
Salary sacrifice is less widespread in Britain than it is in Australia, but it is certainly growing in popularity. There are currently about 50,000-70,000 salary sacrifice cars on our roads. Some analysts believe that, by 2025, about 200,000 cars will be bought on salary sacrifice schemes each year, accounting for a full 10 per cent of the new car market. This makes it very likely that someone you know, be it a colleague, a friend or a relative, will one day buy their car through salary sacrifice. Or perhaps even you will yourself.
Is salary sacrifice suitable for you?
What would you get if you took the plunge? We’ve already mentioned the tax savings: the monthly payments of the car would be deducted from your salary, reducing your Income Tax and National Insurance Contributions in the process. But there are other potential savings too. Many cars purchased through salary sacrifice are treated similarly to company cars. They are often cheaper than on the forecourt as companies can buy them at a lower price than individual consumers. They come with servicing, maintenance and insurance bundled in, meaning that the employee just needs to pay for fuel. They are generally less of a burden on wallets and minds. The average salary sacrifice motorist saves 20 per cent on the monthly cost of ownership, compared to if they’d just bought the car themselves.
No wonder salary sacrifice is so popular with those who choose it. According to one survey, 94 per cent of those who have taken a car salary sacrifice scheme, are pleased that they did so.
But this doesn’t mean that salary sacrifice is for everyone. It needs careful consideration by employers, who have to ensure that their schemes are HMRC-compliant and don’t create costs that cannot be borne in the longer term. And it needs careful consideration by employees, as in certain circumstances – such as employees earning at or near to the national minimum wage or those on a final salary pension scheme who may be thinking of retiring – salary sacrifice simply wouldn’t be viable.
More information on salary sacrifice
We are starting a series of monthly posts about salary sacrifice on our blog, beginning with the one you’re reading right now. We intend to cover everything that matters in this brave new world of pay and perks: the ways, the whys, the pros, the cons, the politics, the environmental impact… everything. Consider today’s post an aperitif ahead of a feast. Bon appetit!
- Sarah Hodgkin, Salary Sacrifice Development Manager