Will Salary Sacrifice Affect My Mortgage?

Will Salary Sacrifice Affect My Mortgage?

A salary sacrifice scheme is an arrangement between an employer and employee, where the employee agrees to give up part of their salary in return for a non-cash benefit (usually a tax-free benefit). The amount of salary that can be sacrificed is usually capped at a certain percentage.

A typical example is pension contributions, but salary sacrifice can also be used for other benefits. Here are a few other examples:

• Childcare vouchers

• Cycle to work scheme

• Car hire/lease scheme

• Gym membership

• Healthcare plans

How do salary sacrifice schemes work?

Under a salary sacrifice arrangement, you and your employer agree to reduce your contractual salary by a certain amount each month. In return, your employer provides you with benefits of a similar value.

The main benefit of salary sacrifice is that it can save you money on things like income tax and National Insurance contributions.

For example, Sarah has a gross annual salary of £50,000. She wants to enter salary sacrifice to save on her childcare costs. Her employer agrees to deduct £250 per month from Sarah's salary, before tax and National Insurance are deducted. This means that Sarah will have less to pay in tax and National Insurance over the course of a year.

When it comes to pension contributions, for example, your employer will make the contribution from your gross salary before you pay income tax on it. This means you can save on both income tax and NI. Salary sacrifice pensions are common in the public sector, but they’re becoming increasingly popular in the private sector too.

What are the downsides of salary sacrifice?

There are a few potential disadvantages of salary sacrifice, including:

• You may have less take-home pay each month, which could affect your ability to meet your outgoings.

• Your NI contributions could fall below the threshold.

• If you leave your job, you may not be able to keep the benefits you’ve been receiving under the salary sacrifice scheme.

• If your salary sacrifice contributions reduce your salary below a certain threshold, you may lose out on certain benefits, such as statutory maternity pay.

• You may find it more difficult to get a mortgage, as certain lenders will take into account your reduced salary when assessing your affordability.

Please note that this is general information only and does not constitute financial advice. Please seek professional advice before making any decisions about salary sacrifice.

Will a salary sacrifice scheme affect my mortgage?

Salary sacrifice schemes are often used by employees as a way of boosting their pension pot, but what many people don’t realise is that salary sacrifice may also have an effect on their mortgage.

Every lender has its own way of assessing applicants, their financial situations and risk level. Most lenders are going to be more concerned with your gross annual income and debt/income ratio, disregarding any loss of income due to salary sacrifice schemes.

Salary sacrifice schemes and affordability calculations

When it comes to affordability calculations, mortgage lenders are more likely to take into account your overall gross salary rather than your lower salary due to a salary sacrifice arrangement. Most lenders are pragmatic in realising that you could opt out of the salary sacrifice if required to meet mortgage repayments.

However, some lenders may take a more cautious approach and factor in the lower salary when assessing affordability. This is more likely to be the case if you're applying for a mortgage with a high loan-to-value (LTV) ratio.

It is always best to speak to a mortgage advisor before entering into a salary sacrifice scheme, to ensure that it will not affect your chances of getting a mortgage.

How will this affect my mortgage repayments?

The amount of salary that you sacrifice each month will reduce the amount of take-home pay you receive.

This may make it more difficult to meet your mortgage repayments, especially if you are on a tight budget. However, if you consider that the benefit you receive is a necessity that you would be paying for anyway (such as childcare), then it could make financial sense for you to join a salary sacrifice scheme.

What happens to my national insurance contributions?

Your National Insurance contributions are calculated as a percentage of your gross salary (the amount you earn before tax is deducted).

If you enter into a salary sacrifice scheme and your salary is reduced as a result, your National Insurance contributions will also be reduced.

You may find that you’re not eligible for certain state benefits, such as the state pension if your salary falls below a certain threshold as a result of salary sacrifice.

It’s always best to speak to an accountant or financial advisor before entering into a salary sacrifice scheme, to ensure that you understand the implications.

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Are salary sacrifice schemes worth it?

Whether or not a salary sacrifice scheme is worth it will depend on your individual circumstances. If your employer offers you a salary sacrifice opportunity and you think it could be beneficial, speak to a financial advisor to ensure that it is the right decision for you.

You will need to weigh up the pros and cons of salary sacrificing. It can be a tax-efficient way of saving towards your pension pot or taking advantage of other employee benefits, but you need to be aware of the potential downsides.

Salary sacrificing if you're self-employed

If you're self-employed, you won't be able to salary sacrifice as you don't have an employer to deduct money from your salary. That being said, there are other ways that you can benefit which will vary depending on the type of self-employment you're engaged in.

For example, if you're a sole trader you could consider making voluntary NI contributions to help boost your state pension entitlement.

You could make pension contributions from your business bank account and receive corporation tax relief on these contributions. Or, you could claim valid expenses associated with running your business such as a private car, mobile phone or business premises.

Speak to an accountant or financial advisor if you're self-employed and looking for ways to reduce your tax bill. It's always best to speak to an accountant or financial advisor before entering into any arrangements, to ensure that you understand the implications.

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