Salary sacrifice is a scheme that allows an employee to give up the right to receive part of their cash-pay, due under her or his contract of employment, in return for the employer’s agreement to provide the employee with some form of non-cash benefit.
Under the terms of the Employer Supported Childcare Vouchers scheme, an individual will sacrifice their cash-pay (taxable salary) in return for childcare vouchers, which are exempt from tax and National Insurance Contributions (NIC).
This means that the employee saves tax and National Insurance on the amount of the voucher, while the employer also makes NIC savings on the same amount. However, it also means that the amount of earnings on which National Insurance is paid is reduced. This may take an individual’s earnings below the Lower Earnings Limit (LEL), which can have long-term implications.
Salary sacrifice schemes are offered to employees on a range of benefits such as computers, bicycles, mobile phones and childcare. HM Revenue and Customs oversees salary sacrifice schemes because they operate under tax law rather than employment law.
