No one likes paying taxes but thankfully there are ways to keep more of your hard-earned cash in your pocket. Salary sacrifice schemes allow you to purchase benefits from your pay packet BEFORE it is taxed – potentially saving you hundreds of pounds each year. Here are a few of the most popular…
Get on your bike
The Government’s Cycle to Work Scheme is one of the best-known salary sacrifice benefits available to PAYE workers – and allows participants to save between 32 per cent and 42 per cent (depending on their tax bracket) on the cost of a new bicycle priced up to £1,000.
The scheme sees your employer buying the bike, reclaiming the VAT and deducting a certain amount of money from your pay before tax each month towards the remaining cost. The bike is supposed to be used to ride to work and back, but you don’t have to do it every day – and you can spend a portion of the amount you borrow on accessories such as helmets, lights and clothing if you wish.
Employers often outsource the administration of this scheme to third party companies, but your payroll department can also choose to make the calculations and adjustments itself.
Max out your pension
Another popular salary sacrifice scheme allows you to top up your pension pot. It can work in a number of ways, but basically you sacrifice part of your salary which is paid to your pension plan directly by your employer, rather than being paid to you.
The result is that you either don’t pay – or can claim back the income tax – on the additional funds put into the pension scheme. Employers also save around 12.8 per cent National Insurance contributions on this money, and some add this to their workers’ pension pots too, so you can potentially benefit even more.
Vouching for childcare
The childcare vouchers scheme allows money to be taken out of your pre-tax and National Insurance salary and paid directly to your child’s nursery or childminder – up to £55 per week or £243 a month.
The vouchers can be used to pay for any childcare that is registered and regulated by Ofsted – which can include summer classes and clubs as well as nursery schools, playgroups, nannies and childminders – up to the age of 15.
It may not sound like much, but paying for childcare this way could potentially save you more than £1,000 a year. For example, if you’re on a basic tax rate, £1,000 salary after tax and NI is worth about £700 in your pocket. For every £1,000 of salary you choose to ‘sacrifice’ or buy childcare vouchers with, you save around £300 as you’re not being taxed – but still getting the same value of childcare.
The scheme is only available via employers, but many large and small companies take part. Check with your personnel department to see if your company has a scheme in place.
A word of caution
If you’re on a low income and receive child tax credits and you accept childcare vouchers you could end up out of pocket. This is because the amount of tax credit you get depends on how much you pay in cash (not vouchers) for childcare. If you do not receive tax credits you’re almost certainly better off buying childcare vouchers.
Not sure if you’re eligible for child tax credit? As a rough guide, you need to earn £26,000 or less as a couple if you have one child and £32,200 if you have two children in order to claim. You will also need to work at least 24 hours a week between you as a couple, or 16 hours a week if you’re single.
If you’re on a low income, it should also be noted that any type of salary sacrifice scheme could potentially affect your entitlement to the state second pension, maternity, paternity, adoption and statutory sick pay – as well as working tax credits and other means-tested benefits – should your National Insurance contributions or earnings fall below a certain level.
Visit the Direct Gov site to check your personal circumstances or contact the tax office for advice.