Rather than instigating company-wide pay cuts, Inez Anderson, a tax adviser at Smith & Williamson, said companies can provide benefits such as childcare vouchers, pension contributions or car-parking facilities.

Through this method, companies can reduce the cash salary on which the employee pays tax and on which both the employee and the business pay National Insurance contributions.

Anderson said: "To be tax effective, a salary sacrifice must take the form of a written amendment to the employee’s contract; it should be made in advance of the salary entitlement crystallising and not be capable of being changed back at short notice.

"It’s also important to watch what impact, if any, there may be on entitlement to state pension, state benefits (such as maternity and sickness) and child tax credits."

Anderson added that companies should review all these schemes for staff benefits, such as life and health insurance, to ensure they are getting the best rates.

Also see:
Companies using recession as an excuse to cut pay, says Unite
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