What is Salary Sacrifice?

Salary sacrifice is a method used by Umbrella companies to ensure the maximum impact of your expenses on the reduction of income tax and National Insurance. It can also be a way in which pension contributions and other payments are made in order to maximise the tax and NI savings.

The way it works is that the expenses, pension contribution, etc are deducted from gross income before starting the calculation of income tax and National Insurance. So, if we imagine an income figure of, say £1,000 and a pension contribution of, say £100, income tax and NI is assessed on £900. This has the effect of saving the NI as well as the tax.

The savings also extend to Employer’s National Insurance so the benefit is substantial; a higher rate taxpayer using an Umbrella company can save more than 47% of the expense; a basic rate taxpayer can save more than 40% (2007/08) depending on gross income and other circumstances.