Understanding Salary Sacrifice

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Posted on: 13th September 2019

Salary sacrifice is an arrangement that may be made available by employers for their employees. In this agreement, the employee will agree to reduce their earnings by an amount that is equal to their pension contributions. In exchange, the employer will then agree to pay the total pension contributions.

Using salary sacrifice will allow both the employee and employer to pay less in National Insurance contributions. Employers may choose to maximise the number of pension contributions by adding the savings they make in lower employer National Insurance contributions to the total amount of pension contribution that they pay.

If your employer is using a defined contribution scheme, such as the People’s Pension, then the required earnings that are used to meet the minimum requirement are based on the post-sacrifice level of salary.

Pension tax relief

If you are wondering about tax relief, this cannot be claimed. This is due to the employee being taxed on a lower amount of salary.

What are the downsides of salary sacrifice?

Salary sacrifice is only for those who may benefit from it and to those who earn above minimum wage. If you do work at minimum wage, this option is not available for you. The minimum wage for those over the age of 25 is currently £8.21 per hour and is known as the National Living Wage.

There are also a few downsides to bear in mind when it comes to salary sacrifice. The first is lower life cover, as the employers will generally work out the entitlement as a multiple of salary and sacrifice. As a result, the salary will be lower.

If you are looking to take out a mortgage, you will be entitled to less ad the borrowing level is determined by a multiple of a lower salary. As well as this, your entitlement to state benefits may be affected if your salary falls below the level at which you pay National Insurance contributions. This could be anything, from Statutory Maternity pay and the State Pension.

Finally, opting out of the salary sacrifice arrangement will mean that your employer will make and adjustment to your refund. This is to pay back the National Insurance contributions, as these savings only apply if your money stays inside a pension.

Salary sacrifice affects the employee’s terms and conditions of employment and is a matter of employment law, not tax or pensions law. Employers who use salary sacrifice should seek specialist employment advice on how they should vary the contract of employment.

Find out more

If you’d like to learn more about salary sacrifice, you can read more in The Pensions Regulator in detailed guidance section 4, or by heading to HMRC. However, we also highly recommend seeking financial advice if you are not sure whether you would benefit from salary sacrifice. This is where Haven IFA can help. Get in touch to learn more about our financial services.