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What impact does salary sacrifice have on my salary and benefits?

If you decide to join a salary sacrifice scheme, you could be wondering how things such as tax, child benefit, and student loans could be impacted. We share all below.

How does salary sacrifice affect my salary?

You’ll sacrifice some of your gross salary in return for an electric company car with the full net package.

Octopus EV will confirm the amount of the gross salary sacrifice and set out the indicative Income Tax and National Insurance savings you could make based on your current salary - you’ll find the details in your Driver Agreement. As we also pay lower National Insurance Contributions following your salary sacrifice, if we allocate these savings to you, we’ll reduce the amount you need to sacrifice, increasing your savings even more.

Why do I need to agree to a reduction in pay to participate in a salary sacrifice scheme?

To save Income Tax and National Insurance on the salary you sacrifice, you must contractually agree to a reduction to your gross salary. A formal salary sacrifice arrangement ensures you’re able to save Income Tax and National Insurance whilst meeting HMRC requirements.

How will my tax change with salary sacrifice?

You won’t pay Income Tax or National Insurance on the gross salary that you sacrifice. You can find the rate at which you pay Income Tax and make National Insurance Contributions on the government website. Click here for Income Tax and here for National Insurance.

A company car is a taxable benefit so you’ll need to pay Benefit in Kind (“BiK”) tax, also known as company car tax.

The good news is that BiK tax rates for EVs remain low at 2% in the tax year 2022-23 and remain there until the tax year 2024/25. As announced in the Autumn Statement on 17 November 2022, BiK will increase by 1% in each subsequent tax year until 2028. You’ll see how much BiK tax you’ll pay in your Driver Agreement.

You’ll pay BiK tax for your company car via a change to your tax code or an increase to your taxable pay. You can speed up the process by amending your own tax code via HMRC's website here.

What happens if the tax on company cars increases?

The government has already announced the rates of tax to be applied to company cars up to 5 April 2028, but if changes were to be announced by the government, we reserve the right to change your salary sacrifice accordingly.

Will salary sacrifice affect any other payments my employer makes to me?

Please speak to our HR/Payroll team to find out more about the potential impact on any other benefits or salary-related earnings that you get.

What if I need a reference for a mortgage or a loan when on salary sacrifice?

Many lenders are familiar with the concept of salary sacrifice and run similar schemes for their own employees. When responding to any lender’s request for a reference, we can confirm the amount of your Reference Salary.

Will maternity, paternity or adoption pay be affected when on salary sacrifice?

Your entitlement to Statutory Maternity Pay ("SMP"), Statutory Paternity Pay ("SPP"), or Statutory Adoption Pay ("SAP") may be affected as a result of your participation in the Scheme if your average gross weekly earnings fall below the weekly earnings threshold.

For more on your entitlement to parental leave and parental pay, visit the Government website.

You can also contact our HR/Payroll team to discuss the impact that salary sacrifice may have.

Will any other state benefits be affected if I’m on salary sacrifice?

Your future entitlement to contribution-based benefits, such as the 'new style' Employment and Support Allowance and Jobseeker’s Allowance, may be reduced if your gross salary falls below the Lower Earnings Limit (“LEL”). This is why a condition of participation in the Scheme is that any salary sacrifice would not reduce your Revised Salary below this threshold.

What impact does salary sacrifice have on Child Benefit?

A tax charge is applied to those whose annual income exceeds £50,000 and who receive Child Benefit, or whose partner receives Child Benefit

For most employees, there will be no impact on Child Benefit, but if you earn over £50,000 participation in the Scheme may reduce or even eradicate this tax charge because HMRC will consider your Revised Salary, not your Reference Salary in their calculations.

Will the amount of tax credits I receive change if I take part in salary sacrifice?

Your entitlement to tax credits may be affected by your participation in the Scheme. HMRC should take your Revised Salary into account when calculating your tax credits but will also take into account the value of the BiK you have paid on your company car.

Given the low rate of BiK tax announced in 2022 for zero-emission cars will continue up to April 20285, if you choose to participate in the Scheme your income for calculating tax credits should reduce, so, your entitlement to tax credits may increase.

If you currently receive tax credits and your annual income changes by £2,500 or more by joining the Scheme, it is recommended that you report the reduction of your income to HMRC as this may trigger a change to Universal Credit. Find out more on the Government website.

Will there be an impact on my entitlement to Universal Credit with salary sacrifice?

Your Universal Credit is affected by your salary after deductions such as Income Tax, National Insurance Contributions and pension contributions. If you’re entitled to Universal Credit and take part in the Scheme, your net salary should reduce, so, your entitlement to Universal Credit may increase. Find out more on the Government website.

Will salary sacrifice impact my student loan repayments?

Loan repayments to the Student Loan Company are calculated by reference to gross earnings subject to Class 1 NIC, once earnings reach the annual repayments income threshold.

As your gross salary subject to Class 1 NIC should reduce your repayments to the Student Loans Company should also reduce as a result of participating in the Scheme.

Could salary sacrifice affect my State Pension?

Your State Pension may be slightly affected by taking part in the Scheme.

Your entitlement to the new State Pension is based on your annual salary - as long as your gross pay exceeds the Lower Earnings Limit, (currently £6,396 per annum) you will be entitled to receive the State Pension.

Provided your gross pay is above this level, participating in the Scheme should have no effect on your entitlement to the State Pension.

For up-to-date advice on rates and thresholds, please see the latest HMRC guidance which can be found here.