Salary Sacrifice - Securing a Lower Tax Bill

Pension Contributions, Cycle Scheme, Childcare Costs & Music Lessons

Jan 18, 2009 Asa Ghaffar

Salary sacrifice can reduce a tax bill. Pension contributions, cycle schemes, childcare costs, music lessons, football coaching & academic tuition can bring tax relief.

Everyone wants to reduce their tax bill and salary sacrifice serves to help employees achieve that objective. Whilst many are aware of the tax benefits of increasing pension contributions, millions more aren't aware of all the ways salary sacrifice can be used as a means of achieving tax relief.

What are Salary Sacrifice Schemes?

A salary sacrifice scheme involves an employee foregoing some of their salary to provide a non-cash benefit. This could take the form of higher pension contributions, taking advantage of a cycle to work scheme, childcare costs or even football lessons for those utilising the services of a child-minder.

What is the Benefit of a Salary Sacrifice Scheme?

The only real benefit of salary sacrifice is that it lowers a tax bill, especially for high-rate tax payers. Reducing a salary through higher pension contributions means that there is less money available to be taxed.

Salary Sacrifice and Pension Contributions

Arranging to make higher pension contributions is not only important in terms of securing a sufficient retirement income, it is also a great way of reducing a tax bill. This can be particularly beneficial to those who plan to retire in a few years as they will experience the benefits relatively soon.

The Tax Bill and Childcare Costs

The childcare voucher scheme allows parents to save on tax and national insurance by paying from pre-taxed income. According to Childcare Choices, "Just 2% of working parents are taking advantage of the scheme, despite potential savings of up to £2,390 if both parents receive vouchers."

The Cycle to Work Scheme

The cycle to work scheme allows an employee to avoid paying tax on a proportion of their income to pay for a new bike. A number of companies run schemes in conjunction with companies, such as Halfords. The national take-up rate still remains as low as 1%.

Take a Salary Sacrifice on Academic Tuition, Football Coaching and Music Lessons

Provided a child is under 16 and is looked after by a registered child minder, a salary sacrifice can be taken. This permits a company to pay an employee up to £55 per week towards football lessons, music lessons or additional academic tuition. Full tax relief is given on these activities and more.

Are there any Disadvantages to Salary Sacrifice?

Whilst the advantage of paying less tax is a major one, salary sacrifice results in a lower level of take-home or net pay. This can present a problem if someone needs higher income multiples in order to get a mortgage. It may also reduce redundancy payments or maternity pay.

Salary sacrifice should be considered very seriously, especially by those paying higher-rate taxation. Whilst it does reduce take-home pay, most tax payers will be better off in real terms. Those with poor job security, planning a family or about to apply for a mortgage should tread carefully.

Those that are interested in tax-free savings may also wish to read about the stocks and shares ISA or cash ISA. Investors with an existing ISA may want to find out how to transfer an ISA to get a better rate of interest on their savings.

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