What is salary sacrifice?
Salary sacrifice or salary exchange is a tax-efficient agreement between you and your employer, where you agree to give up an amount of future earnings (either salary or bonus). In exchange, that amount is paid into an occupational or personal pension scheme on your behalf.
As this contribution isn’t liable for Income Tax or National Insurance, you will actually receive more as a pension contribution.
Added together, these savings mean more money goes into your pension plan at no extra cost to you or to your employer.
What are the benefits?
Benefits to you
- Contributions to your pension is increased at no further cost to you
- You make income tax and National Insurance savings
Are there any drawbacks?
There can be for some people. It’s important to remember that a part of the salary is genuinely being sacrificed. So any transactions based on amount of salary may be affected, For example:
- mortgage borrowing
- contribution-based state benefits such as state pension or incapacity benefit
- working tax credit and child tax credit
- income protection benefits
- personal loans or credit card limits
- Salary sacrifice isn’t recommended if the your salary would be reduced to a level below the national minimum wage
How it works
Here’s how a salary sacrifice arrangement might affect you.
You and your employer contribute 5% of salary to the pension scheme (in other words £1,200 each). In the example below, 100% of the National Insurance contribution saving is paid into your pension fund.
For an employee whose income falls into higher tax brackets, the benefits can be greater. Under a salary sacrifice, they could pay up to 41% less tax on their foregone earnings than they otherwise would have paid, which means more money into your pension.
|Before Sacrifice||After sacrifice|
|Employee Gross earnings||£24,000.00||£22,588.24|
|National Insurance (NI) contributions||£2,012.64||£1,843.23|
|Gross earnings less tax and NI||£17,722.36||£ 17,722.36|
|Employee pension cont. (net of tax)||£960.00||-|
|Net disposable income||£17,722.36||£17,722.36|
|Employer NI contributions||£2,336.06||£2,141.24|
|Employer pension contribution||£1,200.00||£2,806.59|
|Cost to Employer||£27,536.06||£27,536.06|
|Total Pension Contribution||£2,400.00||£2,806.59|
If the employee agrees to a salary sacrifice of £1,411.76 a year, then their take-home pay will stay exactly the same while their pension contribution increases by £406.59 a year.