What is a salary sacrifice and how does it work?
A salary sacrifice is essentially an agreement between an employer and employee that allows the employer to reduce the employees’ remuneration in cash value by adding other non-cash benefits to make up for the decrease in cash value in a tax-effective manner.
These advantages can come in the form of a company car, medical aid scheme, gym membership, childcare vouchers, lease for private parking, etc.
Salary sacrifices are becoming prevalent as the number of businesses entering the market is rapidly increasing.
Why is this advantageous?
Let us tell you:
- Services that an individual may not be able to afford when paid for on their own, may now become available to them as they would acquire that specific service as a benefit to their salary (and the company, in turn, is charged a cheaper rate). Such services may include:
- Medical aid schemes
- Leased parking.
- Gym memberships, etc.
- Tax is charged on the final amount of remuneration that you receive every month. Therefore, salary deductions agreed as part of a salary sacrifice agreement are made before tax. Resulting in you being taxed on a lower overall cash amount, which could put you into a lower tax bracket.
- Some services are considered as essential support for individuals in society. These services are as follows:
- Childcare for parents.
- Healthcare and medical support services.
The above are now offered through salary sacrifices, saving the employee and the employer money.
- Offering non-financial benefits can sometimes be the most effective form of improving employee engagement and retention as they feel valued, particularly younger employees who add greater merit to the work-life balance phenomenon.
The concept of a salary sacrifice has some amazing benefits that make it sound appealing right? Remeber, there are pitfalls, and here are some of them:
- Not available for everyone. Unfortunately, employees who are earning a minimum wage are unable to benefit from salary sacrifices. This is because they will decrease their income below the legal minimum.
- Administrative burden for the employer. As with any new programme or scheme that is company run, there are additional administrative burdens. This is due to the necessary need for the enrolment of staff and dealing with any employee questions.
- Effect on other financial obligations. Other than the obvious decrease in salary that takes place, committing to a salary sacrifice scheme could affect the following:
- Maternity leave pay.
- Mortgage applications.
- Life cover (it is based on your final monthly salary).
- State pension for retirement.
Is it a viable option?
The salary sacrifice scheme is difficult to analyse for a specific outcome. There are many complexities and whether you decide it’s right for you depends on the level of income you earn.
- Low-income earners are unable to sign up to a salary sacrifice scheme as they cannot forfeit any cash remuneration. This might lead to them being unable to pay for essential items.
- Mid-to-high income earners, on the other hand, can afford to invest in a salary sacrifice plan. This is because the salaries paid to them after the reduction is more than enough to live off.
After knowing all the advantages and disadvantages of a salary sacrifice, what are you going to do? We suggest speaking to your company about looking for long-term parking spaces to hire for their employees.