How salary sacrifice can increase your take-home pay

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With inflation soaring and salaries stalling, many of us are feeling the squeeze.

I, for one, am constantly feeling like I’m saving less and less every month, even though I haven’t even maxed out my Fun Fund. 

So what if there’s a way to increase your take-home pay without getting a second job or begging for a payrise?

Well it is possible – by setting up a salary sacrifice arrangement.

Obviously it all depends on your circumstances, and whether your employers even offer it (sorry freelancers), but here’s how salary sacrifice works, and the pros and cons to think about.

What are salary sacrifice schemes?

Salary sacrifice is a financial arrangement where an employee agrees to give up a portion of their salary in exchange for a non-cash benefit. 

So instead of receiving the sacrificed amount directly as part of your salary, it’s redirected by the employer towards your chosen benefit.

Pension contribution is the most obvious choice in terms of benefits, but there are other options too (more below).

In terms of tax, because you’ve given up a portion of your salary, your taxable income is lowered, which potentially means you pay less income tax and National Insurance Contributions (NIC) as the sacrificed amount isn’t subject to either.

The terms and conditions of the arrangement will always be spelled out in your employment contract.

What can you use salary sacrifice for?

It’s worth bearing in mind that not every employer offers a salary sacrifice scheme, and in some cases they might only offer a limited range of options.

This is because there may be some additional admin on their part and if it’s a small company, they might not be up for that.

In terms of what you could ask for, here are some of the most popular options:

1. Pension contributions: Instead of receiving the sacrificed amount as part of your salary, you can redirect it into your workplace pension fund, or even a SIPP if your employer is flexible. 
2. Childcare vouchers: These can be used to pay for registered childcare, such as nurseries, after-school clubs, or childminders. 
3. Cycle-to-work schemes: You can use the money towards buying a bike and related equipment, and this is usually done through a scheme provider. 
4. Health and wellbeing benefits: Gym memberships, health screening, or even dental treatments and eyecare could be included in this.

What are the benefits of salary sacrifice schemes?

Whether a salary sacrifice scheme will benefit you financially will depend on your circumstances.

However, it’s generally seen as a way to get an additional benefit without affecting your take-home pay. 

In some cases, it might actually increase your take-home pay (because you’re paying less income tax and NIC).

Legal and General have a nifty salary sacrifice calculator* that you can use to work out where you stand.

Many people use salary sacrifice to boost their pension contributions because it increases the amount they can pay into a private pension without affecting their take-home pay.

Employers actually save on NIC payments too by offering the scheme, and some will choose to pass on this saving to employees via additional pension contributions.

And of course, it can make your employment package that much more attractive since you can tailor the arrangement to suit you – as long as your employer agrees to it.

What are the downsides of salary sacrifice schemes?

While salary sacrifice schemes can increase your take-home pay, it can also reduce it, which is why it’s really important to crunch the numbers first.

But the crucial thing to bear in mind is that a salary sacrifice scheme will lower your salary on paper – and this is what a mortgage lender would look at, for example, which could affect how much you can borrow.

It would also affect any salary-linked benefits, whether that’s bonuses, life insurance policies, or even Universal Credit and maternity pay.

Because you’re paying less NIC, it could also impact whether you pass the threshold for state pension.

Also, salary sacrifice schemes generally have a contractual period – perhaps over a couple of years – and if you leave your work before it comes to an end, you’ll have to pay the money back as a lump sum and could potentially lose the tax benefits.

And of course, there’s the fact that if you’re on a low salary, you may not be eligible for salary sacrifice at all, since doing so may reduce your income to below minimum wage, which isn’t allowed.