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Salary sacrifice schemes

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I don’t like the sound of this – anything that ‘sacrifices’ my hard earned cash can’t be good thing, can it? Well, it turns out that it can, in certain circumstances. Read on to find out how you could boost the value of your overall benefits package by sacrificing some of your salary.

What is It?

Salary sacrifice has its roots in the concept that you pay tax and national insurance on all money that you earn. If your employment package includes benefits that can be considered tax-free, then repositioning these elements of your earnings under a salary sacrifice scheme effectively reduces your cash income, and the amount of tax you pay. It also means that your employer pays less in National Insurance on your behalf, some will share a portion of this saving with you.

Does it Reduce my Income?

Yes. And No. Let’s say that as part of your package your employer pays you a cash figure as a contribution to childcare costs, or that you simply pay your own childcare costs direct from your income. If your employer offers you childcare vouchers instead, this can be considered a tax-free benefit. Your actual cash income goes down but you still get more overall, it’s just that a portion of it will be in the form of vouchers for something you would be buying anyway. You still get to choose your childcare provider, as long as they are state or otherwise registered (which most are). There are limits to the amount you can ‘sacrifice’ in this way (currently £243 under basic rate tax) but the saving can be worth it.

How much Could I Save?

salary sacrifice schemesAs a simplistic example, let’s assume your basic gross pay is £2000 a month. After tax and NI you receive £1571 take-home pay. If you sacrificed £243 of your gross pay for childcare vouchers your take-home pay would drop to £1406, but you still get the £243 for your childcare, so your actual earnings climb to £1649. That makes you £78 better off each month because you’re no longer paying tax and NI on the £243. Good, eh?

You can also wangle a better deal on your pension in a similar way, by agreeing to allow your employer to make a direct contribution into your pension scheme instead of paying you direct. Once again your cash income falls on the face of it, but your overall benefit increases.

Beware Tax Credits

Before you opt for a salary sacrifice scheme it’s important to check out any impact if may have on tax credits you are already receiving. In respect of childcare, if you are already getting help with costs via the tax credit system then you are probably better off sticking with that. You can only claim tax credits for direct childcare expenses that come from your own pocket. The value of these broadly works out as greater than the benefit you would gain from claiming childcare vouchers under a salary sacrifice scheme.

Not all employers offer salary sacrifice as an option, but if yours does then it may be worth discussing it with them to see if you can squeeze a little more out of your earnings package. As with all such schemes be sure you understand exactly what the impact on your earnings will be before committing.

A Final Note – New Government Scheme for 2015

The New Year has seen the introduction of a new government scheme open to families with children under 12 years of age, and who are not already claiming childcare tax credits. You pay childcare funds of up to £2000 per year per child into a special online account. The government then top up your funds with an additional 20% of the value, which is equivalent to the basic rate of tax.

 

 

 

 

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About Cally Worden

About Cally Worden

Seasoned freelance writer Cally Worden lives with her family and dog in a quiet corner of rural France. A love of the outdoors, and a fascination with her children's ability to view life with fresh eyes provide the inspiration for much of her work. Cally writes regularly for various websites and UK print publications on subjects as diverse as parenting, travel, lifestyle, and business, and anything that makes her smile.

Website: Cally Worden

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