How might accessing childcare vouchers through a salary sacrifice scheme adversely affect my benefit entitlements?

The Inland Revenue states that, for most employees, paying less NICs will not adversely affect benefit entitlements. This is because the employee will probably still be:

• paying enough NICs to qualify for benefits;
• earning between £79 a week (which is the Lower Earnings Limit for the tax year 2004/2005) and £91 a week (the Primary Threshold for the tax year 2004/2005) so they are deemed to be paying NICs for the purposes of building up benefit rights even if they are not actually paying NICs;
• already earning below the LEL before the salary sacrifice starts.

Also if the employee only joins the salary sacrifice scheme for a short period of time, then their contribution history will only be affected for that period and the effect on their benefits may be minimal.

However, it is important to be aware of those benefits that might be affected by joining a salary sacrifice scheme. Entitlement to some state benefits is based on the amount of NICs an individual has paid, or is deemed to have paid – these are known as contribution-based benefits. Contribution-based benefits include Incapacity Benefit; Jobseeker’s Allowance (JSA); and State Pension, including the State Second Pension.

Reducing cash-pay through salary sacrifice can reduce the amount of earnings on which an individual pays their NICs to below the LEL. This, in effect, could mean that they are no longer paying (or deemed to be paying) NICs. However, even if an individual’s earnings remain above the LEL, she or he will be paying less NICs and so may be reducing their entitlement to contribution-based benefits.