What is a ‘salary sacrifice’ pension scheme?
- TBA
- Jun 7, 2024
- 2 min read
Updated: Mar 13
Have you heard of ‘salary sacrifice’ pensions?
This type of occupational pension is aimed at helping individuals save on tax contributions whilst also contributing to their pension.
Let’s find out more!
1. What is ‘salary sacrifice’?
A salary sacrifice arrangement equates to tax savings for employees.
Employees agree to reduce their monthly salary, with the sacrificed amount paid directly into their occupational pension by the employer.
Consequently, the employee’s taxable income decreases, and the sacrificed salary can grow tax-free in the pension fund.
This arrangement also reduces the employer’s National Insurance contributions, which can then be potentially used to reinvest into employee pensions.
Example:
Consider the case of Mr W, a manager earning £50,000 annually.
Regular Occupational Pension:
Mr W contributes £2,500 (5% of salary), and the employer contributes £1,500 (3%)
The total pension contribution is £4,000
Mr W’s PAYE and NIC: £11,477.60
Net annual salary: £36,022.40
Employer’s NIC: £5,644.20
Salary Sacrifice Pension:
Mr W sacrifices £2,500, reducing the annual salary to £47,500
Employer adds the sacrificed £2,500 plus their £1,500 contribution to the pension
Total pension contribution: £4,000
PAYE and NIC: £11,177.60
Net annual salary: £36,322.40
Employer’s NIC: £5,299.20
2. Employer Benefits
Employers save on National Insurance contributions, and savings increase as more employees are hired.
For example, with 50 employees each earning £50,000 and sacrificing 5% of their salary, an employer can save £17,250 annually.
3. How do Employers Gain from this?
The main benefits are:
Increased take-home pay due to reduced taxes
Higher pension contributions
Compound growth of pension savings over time
The potential drawbacks are:
Restricted for low-income employees if the salary falls below the National Minimum Wage
May affect income-related benefits and statutory pay calculations
4. Implementation
Employers should contact payroll or pension providers to offer this scheme. Employee consent is needed, typically through contract adjustments.
Salary sacrifice arrangements often ‘win-win’, saving money for both employers and employees.
However, it’s crucial for employees to understand the pros and cons before opting in, especially higher-rate taxpayers or those concerned about future financial implications such as mortgage applications.