Are you aware of Salary Sacrifice?
If you are employed you will hopefully be a member of a pension scheme provided by your employer. In that case both you and your employer will be contributing to that pension scheme.
However, you may not be aware of the financial advantage of sacrificing part of your salary so that your employer pays both the employer pension contribution and your employee pension contribution as a further employer contribution.
The main advantage of salary sacrifice is a greater amount in your pension or higher take home pay, as you’ll be paying lower National Insurance contributions (NICs).
Let's see how it works
Let’s look at an employee subject to UK tax with a gross salary of £24,000 in the 2022/23 tax year. They are making a personal contribution of £960 (net) a year into their plan. After tax relief of 20% from the government is added, this is gross contribution of £1,200. Their current situation is as follows:
| Gross Salary | 24,000 |
| Income Tax and NI | - 4,157 |
| Personal Pension Contributions | - 960 |
| Take home pay | 18,883 |
They choose to give up £1,438 of their gross salary and, in exchange, their employer pays the increased amount of £1,438 into their plan, as an employer contribution. Their situation is now as follows:
| Gross Salary | 22,562 |
| Income Tax and NI | - 3,679 |
| Personal Pension Contributions | 0 |
| Take home pay | 18,883 |
Their take-home pay is not affected and stays at £18,883. But the pension contribution has increased by £238 or 19.8%.
In this next example, the employee chooses to keep their pension contribution of £1,200 the same (as it was without salary sacrifice). And use salary sacrifice to boost their take-home pay. Their current situation is as follows:
| Gross Salary | 22,800 |
| Income Tax and NI | - 3,758 |
| Personal Pension Contributions | 0 |
| Take home pay | 19,042 |
These figures are based on the tax and National Insurance rates for the 2022/23 tax year. In these examples, none of the employer NI saving is added to the pension contribution after sacrifice.
Your employer will also pay lower NICs. You might therefore also benefit from more pension contributions from your employer, if they are giving you some or all the money they’re saving on NICs.
You may also sacrifice a one-off item such as a bonus.
Of course, your employer will need to agree to any salary sacrifice arrangement but apart from a little extra paperwork there is no disadvantage to your employer to provide this benefit to you.
As with anything there can be disadvantages in using salary sacrifice and before you speak to your employer I would encourage you to look at the fuller information I have provided on my website https://usefulmoneyguide.uk/salary-sacrifice/
Arthur
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