Salary sacrifice pensions offer businesses and employees a tax-efficient way to contribute to workplace pensions. This guide explains how salary sacrifice works, its potential benefits, and key considerations for employers.

What Is Salary Sacrifice?

Salary sacrifice is a government-approved arrangement where employees agree to give up a portion of their pre-tax salary in exchange for non-cash benefits, such as pension contributions. By reducing their taxable income, employees and employers save on National Insurance contributions (NICs).

How Does a Salary Sacrifice Pension Work?

In a salary sacrifice arrangement for pensions:

• Employees agree to redirect part of their salary directly into their pension.
• Employers then contribute the ‘sacrificed’ amount to the employee’s workplace pension on their behalf.

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This reduction in taxable income benefits both parties: employees keep more of their pay, and employers lower their National Insurance bill.

Salary Sacrifice in Action

Here’s an example of how salary sacrifice can impact employer and employee contributions:

• Before Salary Sacrifice: An employee earning £50,000 contributes 5% (£2,500) to their pension. The employer adds 3% (£1,500), making a total contribution of £4,000.
• After Salary Sacrifice: The employee’s taxable salary reduces to £47,500 after sacrificing 5% (£2,500) of their income for pension contributions. The employer adds this amount to their existing contribution.

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Results:

• Employee tax and NICs decrease, increasing take-home pay.
• Employer NICs also reduce, saving costs per employee.

Benefits of Salary Sacrifice for Employers

Adopting a salary sacrifice pension offers several advantages:

• Lower NIC Bills: Reduced employee salaries mean employers pay less in National Insurance. For larger workforces, these savings scale significantly.
• Enhanced Recruitment and Retention: Competitive benefits packages, like salary sacrifice pensions, help attract and retain top talent.
• Improved Employer Brand: Supporting employee financial well-being creates a positive company image.

Benefits of Salary Sacrifice for Employees

Salary sacrifice can also benefit employees by:

• Boosting Take-Home Pay: Lower National Insurance contributions leave employees with more in their pockets.
• Increasing Pension Contributions: Employees can channel savings back into their pension for greater long-term growth.

Considerations for Employers

While salary sacrifice offers many benefits, there are some important factors to consider:

• Minimum Wage Restrictions: Employees cannot participate if the sacrifice reduces their salary below the legal minimum wage.
• Impact on Salary-Based Benefits: Benefits like loans or life insurance, often based on gross salary, could be affected. Employees may need to clarify their adjusted salary with lenders.
• Potential Maternity Pay Reductions: Statutory maternity pay may decrease as it’s calculated from average weekly earnings.

Setting Up a Salary Sacrifice Pension

To set up a salary sacrifice scheme:

1. Coordinate with Your Payroll Provider: Ensure they can facilitate the arrangement.
2. Obtain Employee Consent: Employees must agree to the changes in writing, often via an updated contract or letter.
3. Manage Opt-Outs: Allow employees to opt out if they choose.

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If your current pension scheme doesn’t offer salary sacrifice, consider consulting a financial advisor or exploring alternative providers.

Why Salary Sacrifice Matters

For businesses navigating rising employment costs, salary sacrifice can be a valuable tool. By reducing National Insurance contributions for both employers and employees, it provides a tax-efficient way to enhance workplace benefits while saving costs.

Use this site’s Salary Sacrifice Calculator to see how much your business could save.