A guide to salary sacrifice and your pension
1. What is salary sacrifice?
Salary sacrifice (also known as ‘salary exchange’) is a tax-efficient opportunity to increase your pension contributions without affecting your income. It can bring tax savings for your employer, too.
No tax paid on amount ‘sacrificed’
As its name suggests, salary sacrifice is an arrangement with your employer under which you agree to reduce your salary by the amount you want to contribute to your pension. You won’t have to pay tax on the amount that is ‘sacrificed’ or ‘exchanged’, so you could save on both Income Tax and National Insurance.
Non-cash benefits
Salary sacrifice is more common than you might think. Companies often use it to enable their employees to pay for things like gym membership or a new bicycle – as well as pension contributions – through their company’s payroll. Whatever the benefit being bought is, these deductions from your salary can reduce how much tax you pay.
2. What are the benefits of salary sacrifice?
Salary sacrifice is an arrangement under which both employees and employers pay less in tax. When it comes to saving for retirement, it’s also an efficient way to boost your pension savings without affecting your take-home pay.
If you’re an employee
Pay less in National Insurance Contributions and Income Tax
The main benefit of salary sacrifice is that you’ll pay less in both National Insurance and Income Tax. This is because you’re effectively reducing your taxable income. These savings will increase either your pension contributions or your take-home pay, depending on how your employer’s scheme is set up.
Increase your pension savings
Salary sacrifice means you can boost your pension savings without any negative effect on your take-home pay. If you qualify for a financial bonus at work, salary sacrifice can apply to bonus payments, too.
If you’re an employer
Pay less in employer's National Insurance
Introducing salary sacrifice will mean that you save money because you’ll be paying less in employer’s National Insurance. You can choose to pass some or all of these savings on to your employees in the form of greater employer’s pension contributions, too.
3. Examples of how salary sacrifice works
For employees
Jason earns £30,000 a year and sacrifices 5% of his salary to his pension, which equates to £1,500 a year.
- Salary: £2,500
- Salary sacrificed: £125 per month, £1,500 a year
- National Insurance savings as a result of salary sacrifice: £120
Impact on your pension
If National Insurance savings are paid into your pension you would see an increase in your pension contributions of £120 a year. With little or no difference to your take-home salary, based on historic investment performance* you could see an extra:
- £1,981 more in his pension pot after 10 years
- £5,207 more in his pension pot over 20 years
Your employer may choose to add the savings to your take-home pay and you would see an increase of £12.50 per month due to reduced National Insurance contributions. This would be discussed as part of the consultation process.
*Projections calculated using monevator.com/compound-interest-calculator/
For employers
Example yearly employer NI contribution savings
Figures are based on an average salary of £30,000 for each employee and contribution rates of 5% of total pay.
| 10 members | 50 members | 100 members | 200 members | |
|---|---|---|---|---|
| Salary sacrifice by employees | £15,000 | £75,000 | £150,000 | £300,000 |
| Employer NI contribution rate (2023/2024) | 13.8% | 13.8% | 13.8% | 13.8% |
| Yearly employer NI contribution savings | £2,070 | £10,350 | £20,700 | £41,400 |
You can choose to pass on all or some of these savings into your employees pension savings, or alternatively you van decide to retain it for the benefit of your business.
4. What you need to know about salary sacrifice
If you’re an employee
It could affect how much you can borrow
There are a few things to bear in mind when considering salary sacrifice. Because your payslip will show a lower salary, the amount of money you may be able to borrow from a bank or building society (typically for a mortgage or a personal loan) may be affected.
_health.svg){kind=icon}
It could affect certain benefits you’re entitled to
Your entitlement to workplace or government benefits, such as death-in-service insurance or Statutory Maternity Pay, may change, too.
Your employer should provide you with an overview of how salary sacrifice might affect you. It’s worth taking all this information into account before deciding whether salary sacrifice is right for your own personal circumstances.
Minimum wage requirements
Bear in mind, too, that while there’s no official limit to how much salary you can sacrifice, in practice you cannot sacrifice or exchange so much pay that your earnings then fall beneath the National Minimum Wage.
If you’re an employer
Changing employees’ contracts
There are some rules you’ll need to think about, too. You’ll need to change all your employees’ contracts of employment to reflect the change to salary sacrifice in your workplace pension provision.
Seek legal help
Smart Pension does not offer financial advice. As an employer, you may need to seek specialist legal help on how best to do this, and it’s important to communicate with your employees as you introduce a salary sacrifice arrangement.
You’ll also need to make a decision about what to do with the money your business saves.
5. How to get started with salary sacrifice
If you’re an employee, have a look at our guide on How Salary Sacrifice works.
If you’re an employer, you can find further information in our Short guide to salary sacrifice.
