Salary sacrifice Ways to save money using salary sacrifice

Here we explain how giving up a portion of your salary in return for a bike, childcare vouchers and additional pension might work in practice.

Salary sacrifice and bikes

Save money on your bike by using salary sacrifice

Salary sacrifice and bikes

You start by choosing the bike you want, which is bought by your employer who then leases the bike to you. Many employers can reclaim the VAT and have the option of passing this saving on to the employee. The employee's salary is reduced by the net cost of the bike for the payment period.

As your salary is reduced, tax and NI are also reduced. After the hire period ends, the employer may agree to sell the bike to the employee at a 'fair market value' i.e. what a second-hand bike of that make and condition would be worth if sold on the open market.

How it works

Here's how it might work for someone earning £30,000 a year during tax year 2011-12. Payment period is set at 12 months, but total hire period is set at 36 months - but the employee pays only for 1 year:

  • Monthly take-home pay after tax and NI: £1,897
  • Full cost of bike: £850 plus VAT of £170: £1,020
  • Employer purchases bike and reclaims VAT
  • VAT saving passed to employee, so salary sacrificed is: £850
  • Salary reduced to £29,150 for 12 months
  • Monthly take-home pay after tax and NI on £29,150: £1,849
  • Difference in monthly take-home pay for 12 months: £48
  • After 36 months employee buys the bike at fair market value plus VAT
  • On an £850 bike this is now 12% of purchase price plus VAT: £122.40

Total cost of bike

  • Difference in take-home pay for 12 months: £576
  • Fair market value price of bike + VAT: £122.40
  • Actual cost of bike to employee: £698.40
  • Saving on the full cost of the bike (£1,020): £321.60

Childcare vouchers and salary sacrifice

Employees can receive up to £55 a week or £243 a month in childcare vouchers, free of tax and NI. The amount is restricted for higher rate (40%) taxpayers - the maximum they can receive tax-free is £28 a week. Additional rate (50%) taxpayers are limited to £22 a week. 

You receive the same salary as usual, but part of it is paid to you as tax-free childcare vouchers, which you pass on to your childcare provider. Both parents can claim, effectively doubling the benefit, and higher-rate taxpayers save even more. However, if you are claiming tax credits to help with the cost of your childcare, you might lose out if you claim childcare vouchers. 

How it works

Here’s how it could work for someone earning £30,000 a year in 2011-2012 and claiming the maximum childcare vouchers of £243 a month:

  • Tax and NI paid on salary of £30,000 during tax year: £7,238
  • Tax and NI paid on salary of £30,000 where max of £243 a month (£2,916 a year) is paid in childcare vouchers: £6,304
  • Saving over the tax year: £934

Increasing your pension with salary sacrifice

You can increase what you pay into your pension and both you and your employer can save on NI by giving up part of your salary and directing it to your pension instead. 

In the example shown, the employer would save on NI contributions (£128) and might be persuaded to add this saving to the contribution, boosting the amount paid towards pension even more.

How it works

Here's how it might work for someone earning £25,000 during 2011-12 where both employee and employer pay 3% of salary into a group personal pension scheme (GPP). The employer cuts the amount paid in salary by £1,000 but makes a corresponding additional contribution to the employee's pension fund.

Before salary sacrifice

  • Employee contribution: 3% of £25,000 (£750 plus tax relief): £900
  • Employer contribution: 3% of £25,000: £750
  • Total contribution: £1,650

After salary sacrifice

  • Employee contribution: 3% of £24,000 (£720 plus tax relief): £864
  • Employer contribution: 3% of £24,000 plus £1,000 from salary sacrifice: £1,720
  • Total contribution: £2,584
  • Increase to pension contribution because of salary sacrifice: £934
  • Less difference in take home pay: £320
  • Net boost to pension: £614

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