Your employer might offer you the option of salary sacrifice as part of their pension scheme. This is a way to make your pension saving more tax-efficient and could mean your take home pay increases.
If you choose to take up the option, you and your employer will agree to reduce your salary, and your employer will then pay the difference into your pension, along with their contribution to the scheme.
As you’re effectively earning a lower salary, both you and your employer pay lower National Insurance contributions (NICs), which often means your take-home pay will be higher. Better still, your employer might pay part or all their NIC saving into your pension too (although they don’t have to do this).
An employee may also sacrifice a one-off item such as a bonus.
Is it right for you?
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).
Your employer will also pay lower NICs. You might benefit from more pension contributions from your employer, if they are giving you some or all the money they’re saving on NICs.
Can I use salary sacrifice if I earn a low salary?
It depends what your salary is. You can’t use salary sacrifice if it would reduce your earnings below the minimum wage.
How could salary sacrifice benefit me?
You won’t pay tax and NI on the amount you sacrifice, so you can either:
- increase your level of contribution with no impact on your take-home pay, increasing the size of your fund or
- keep the same level of pension contribution while increasing your take-home pay.
Your employer will also save on their NI payments and might share these savings to increase your contributions even further.
It’s easy for you, as your employer makes all the arrangements.
Can I change the amount of salary I want to sacrifice?
Salary sacrifice is a formal, agreed change to your contractual terms and conditions. You can normally change the amount you sacrifice – increase or decrease the amount. However, your employer may have rules around when you can do this. You can also opt out of salary sacrifice at any time.
Things to consider
Salary sacrifice isn’t always suitable for everyone. You should think about:
- If your employer is providing you with life cover, this is usually worked out as a multiple of your salary. Your employer might provide less life cover if you sacrifice some of your salary. Your employer should tell you if any workplace life cover is based on your pay before or after the salary sacrifice deduction.
- The impact on any other benefits that are linked to salary, for example sick pay, working tax credit/child tax credit, although it’s still possible for an employer to use a ‘notional’ or pre-sacrifice salary for these benefits
- Your lower salary might affect the amount of money you’re able to borrow for a mortgage.
- Statutory benefits which may be affected by a reduction in salary, for example statutory maternity and paternity pay.
- In a defined contribution pension scheme, you can only get a refund of your contributions if you opt out of or leave the scheme within 30 days of joining it. As these contributions will be made by your employer, if you opt out or leave after 30 days – your pot will remain invested and you won’t be able to access the money until the age of 55 (57 from 2028).
You don’t have to go ahead with salary sacrifice if you don’t think you’ll benefit enough.
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:
|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:
|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 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:
|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.
Employer National Insurance savings
Your employer won’t pay employer’s NI on the salary you give up and may choose to share the savings with you by increasing how much it contributes to your pension.
If your employer is passing on any of their NI saving, let’s look at how this may also increase contributions to your pension. This example is based on them passing on all 15.05% of their NI saving as well as making an employer contribution of £1,200 a year.
|Pension contribution with salary sacrifice||1,438|
|Employer NI saving||216|
|Total pension contribution||2,854|
This is an increase of £454 or 37.8%
The amount of NI saving your employer shares is entirely at their discretion and they may change it at any time, for example in response to changes to employer NI rates or changes to HMRC rules governing salary sacrifice. If there are any changes, they’ll let you know.
Change the terms of a salary sacrifice arrangement
If an employee wants to opt in or out of a salary sacrifice arrangement, their contract must be altered on each occasion. An employee’s contract must be clear on what their cash and non-cash entitlements are at any given time.
It may be necessary to change the terms of a salary sacrifice arrangement where a lifestyle change significantly alters an employee’s financial circumstances.
This may include:
- changes to circumstances directly arising as a result of coronavirus (COVID-19)
- partner becoming redundant or pregnant
Salary sacrifice arrangements can allow opting in or out in the event of lifestyle changes like these.
As a general rule, if an employee swaps between cash earnings and a non-cash benefit whenever they like, any expected tax and National Insurance contributions advantages under a salary sacrifice arrangement will not apply.
Changes cannot be retrospective
The National Minimum Wage (NMW) is a consideration, as the cash wage should not fall below a set figure. Apart from living accommodation, benefits in kind do not count towards the NMW. It makes no difference whether or not the benefit is taxed
Tax and National Insurance contributions exemptions on non-cash benefits
The benefits listed below are not chargeable to income tax:
- Workplace car parking
- Provision of cycles and cyclist’s safety equipment (including cycle to work)
- Childcare vouchers
- Workplace nurseries
- Other Childcare
- Employer made contributions under a registered pension scheme
- Employer provided pensions advice
Varying the contract can be achieved in a number of ways
- rewriting the document in part or whole
- setting out agreed changes in a separate document that is attached to the main contract. This may be a letter or a pro-forma
- employees may be informed of proposals to make changes by the employer
- The employer may specify that if an employee has not indicated his/her wish not to participate in the changes by a certain date, the absence of an “opt out” will be regarded as an “opt in”.
The role of HMRC
Salary sacrifice is a matter of employment law, not tax law. The nature of an employee’s contract of employment is a matter for the employer and employee. HMRC’s interest is in determining how the tax and NICs legislation applies to the various elements of the employee’s remuneration package.
If an employer requests advice in organising a salary sacrifice, HMRC will explain that this is a matter between the business and the employee. HMRC cannot give advice on the terms and conditions of an employee’s contract.