Considering a sacrifice?

Many employers offer the option to give up some pay in exchange for benefits - this is known as a salary sacrifice.

Increasingly, employers are offering flexible benefits where you choose which fringe benefits you want either within an overall allowance or in exchange for giving up some pay, called salary sacrifice. The benefits most commonly offered through salary sacrifice schemes are extra pension contributions, childcare costs and bicycles.

Salary sacrifice involves 'permanently' giving up part of your cash earnings in exchange for non-cash benefits. The arrangement may be altered again later and in practice 'permanently' generally means for at least a year. (If benefits can easily be converted back to cash, the Revenue will tax them as cash earnings.)

Salary sacrifice can mean tax savings for both you and your employer. However a reduction in your pay can have a knock-on effect on pay-related arrangements such as pension contributions, sick pay, maternity pay and tax credits, so think through the arrangement carefully before going ahead.

Written by Sara Williams and John Bloxham. Taken from the FT Guide to Personal Tax 2011-2012