What does it mean?

In its simplest terms, a salary sacrifice arrangement is where an employee elects to give up an agreed portion of their income, in exchange for a non-cash benefit.  That benefit can come with tax advantages over their normal salary.

In the main, Salary Sacrifice Schemes are used to enable people to make tax efficient pension contributions and this article explains this in more detail.

How does it work?

Umbrella workers are employees and as such are able to sacrifice a portion of their salary in exchange for a non-cash benefit just like any worker.  However not all umbrella companies offer any form of salary sacrifice scheme as they are admin-heavy and therefore not simple to administer.  Umbrella workers often have irregular payments or short term contracts and this can add to the complications of running such a scheme.

For a Salary Sarifice scheme to work and not be seen as an artificial way of reducing someone’s tax bill, the amount sacrificed must be fixed and should only be changed when a worker’s lifestyle or financial situation changes significantly.  Clearly as many umbrella workers have irregular payments, this may not always be possible.  Therefore, Salary Sacrifice schemes tend to work best for long term contractors on higher earnings and are most popular in the IT sector.

Pension Salary Sacrifice

This is the most common arrangement and the details of the scheme may be included in the workers’ contract of employment or in a separate Salary Sacrifice Agreement.  The way the process works is as follows:

• The worker agrees with the umbrella company the amount they wish to sacrifice, normally a percentage of their earnings per month.
• The agreement is signed by both parties.
• When the worker is paid, their gross income is reduced by the agreed amount and this amount is paid into the worker’s pension scheme (this tends to be a SIPP – Self Invested Personal Pension).

Pros and Cons

Pros

Your pension contributions are enhanced

You pay less tax and NI

Cons

You may have to pay a fee for processing the pension payment

A lower salary may affect mortgage and loan applications or reduce entitlement to State Benefits

You can’t chop and change the amount you sacrifice

You can’t sacrifice all of your earnings as the umbrella company must still pay you at least National Minimum Wage

To find out more about how Kanopi can help you with setting up a Salary Sacrifice arrangement, give us a call on 01524 952777 or Click here