A salary sacrifice is a voluntary reduction in your salary in exchange for tax-free benefits. These benefits can include:
• Child care vouchers
• Cycle to work schemes
• Bus passes for commuters
• Canteen tokens
• Staff car parking and vouchers
The Government have also launched a consultation into the promotion of payroll giving. The aim is promote the system that allows monthly charitable donations to be taken from your salary before tax and National Insurance are deducted.
Ironically, the higher your income, and therefore your marginal tax rate, the less you will have to contribute to achieve the same result. For example:
1. If you pay income tax at 20%, and want to contribute £20 a month to a charity you would have approximately £16 stopped from your salary.
2. If you pay income tax at 40% and want to contribute £20 a month to a charity you would have approximately £12 stopped from your salary.
3. If you pay income tax at 45% and want to contribute £20 a month to a charity you would have approximately £11 stopped from your salary.
You could also use a salary sacrifice arrangement to reduce your taxable income if it seems likely that it will break through a significant tax threshold. For example:
• If your income is about to exceed £100,000 you will lose your personal tax allowance at the rate of £1 for every £2 your income exceeds £100,000.
• If your salary, or that of your partner, is about to exceed £50,000 you may lose entitlement to some or all of Child Benefit you may receive.
• You could also use salary sacrifice to keep your income below an increase in a tax band rate: from 20% to 40% or 40% to 45%.
It is important to crunch the numbers before you approach your employer so that you can quantify the benefits.