Cash clinic: salary sacrifice really can save money for staff and employer

My employer has asked if I would be interested in entering into a "salary sacrifice", where some of my pay is instead paid into my company pension scheme. However, I am worried that this doesn't sound right for me - do you have any advice on what I need to think about before I do this?

Q My employer has asked if I would be interested in entering into a "salary sacrifice", where some of my pay is instead paid into my company pension scheme. However, I am worried that this doesn't sound right for me - do you have any advice on what I need to think about before I do this?

CS, Edinburgh

A Salary sacrifice schemes are actually an excellent way for both you and your employer to benefit from your pay being reduced. It may sound odd that a pay cut can be beneficial, but these arrangements are becoming more widely used as they save national insurance contributions (NICs) for both parties.

Let's assume you currently pay 4 per cent of your income into your company pension scheme and that this is matched by your employer with a further 4 per cent; the total contribution into your pension scheme is 8 per cent.

If you enter into a salary sacrifice, you will no longer make a pension payment and would take a 4 per cent pay cut but your employer would pay the full 8 per cent into your pension scheme instead. Since your pay will be reduced by 4 per cent, you will save on your NICs as this will only be charged on your new, lower, salary. The amount you save will depend on your whether or not your original salary was above the NIC upper earnings limit (42,485 for 2011/12) but your net take-home pay should not be reduced by the arrangement.

In addition, many employers also choose to add some of the saving that they make in NIC on the employee's reduced income (13.8 per cent in 2011/12) into his or her pension pot making the overall contribution higher than if you had continued with your existing arrangements.

While employees are often sceptical about such schemes, they may help to partly offset the NIC increase that takes effect from April 2011 and are simply one of many ways in which employers are trying to reduce overall costs without hurting their employees. Such schemes will work for most businesses - and within the public sector - and it is certainly worth considering if your employer has given you this option.

• Brian Lovie is director of employment taxes with accountants and business advisers PKF.

Q I regularly give donations, usually around 25 a time, to a number of charities. Over a year I would estimate that my total giving is in excess of 750. I gather there is currently a scheme operating which enhances charitable donations through tax relief. I do not wish to be tied to giving the same sum each time I make a donation, but I would like to know if, and how, I can join such a scheme.

BE, Linlithgow

A The scheme is known as Gift Aid, and it enables charities to claim back tax provided the donor has paid sufficient income and/or capital gains tax to cover the amount reclaimed by the charity on his or her donation.Gifts of any size can be made under the scheme and the rules for certifying gifts are now less formal than when the scheme was introduced.

To ensure your donations qualify for Gift Aid, you can simply ask the charity or charities to provide you with a Gift Aid declaration form to sign and return, to confirm that you are a taxpayer and that you wish your donations to become eligible for Gift Aid. It is possible to make the declaration after you have made your donation and it need not always be made in writing. For example, it could be made by telephone when pledging a donation on a TV telethon. Further details of the scheme are available at the HM Revenue and Customs website: www.hmrc.gov.uk/individuals/giving/gift-aid.htm.

• Neil Whyte is tax partner with PKF.

If you have a question you need answered, write to Jeff Salway, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected].

This above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given.

The Scotsman Publications Ltd accept no liability on the basis of this article.