Salary Sacrifice Pension
Also known as ‘Salary Exchange,’ this is an alternative arrangement for making pension contributions. It is becoming increasingly popular, as employers look to save money for themselves and their employees in these tough economic times. Salary sacrifice is also used for other benefits such as the Cycle to Work scheme.
What is it?
Salary Sacrifice is when an employee agrees to give up part of their salary, equal to their pension contributions (5% is the standard amount) and in return this reduces the amount of tax and NI payable by the employee.
How can it benefit you and your employees?
Because the employee’s salary has been reduced, they will pay less tax and NI. Employers will also pay less Employer NI contributions on the reduced salary. The employer can then choose to pass this saving on to the employee by increasing the pension contribution by this amount.
Higher rate taxpayers will benefit the most and will also receive instant tax relief on their pension contributions, so no longer need to claim back the additional tax relief via self-assessment.
An Example of savings based on a salary of £30,000 per year-
The annual salary would be reduced to £28,500 and the employee would receive £120 extra net pay per year (based on a standard tax code).
The employer would save £207 per year in Employer NIC (£1500 pension contribution x 13.8%).
An employee earning a salary of £60,000 per year would receive £660 extra net pay (based on a standard tax code). The employer would save £414 per year in Employer NIC.
Are there any disadvantages?
You won’t be able to offer Salary sacrifice if it reduces an employee’s pay below the national minimum wage. For part time workers, this could reduce the level at which they pay NI, so may affect entitlement to state benefits.
Employee contracts would need to be revised, so you would need to seek specialist advice about this.