Salary Sacrifice

Salary Sacrifice is offered by some employers as a means for their employees to receive increased pension scheme contributions.

It is not an effective way of saving for everyone so it is important it is well communicated and understood by all employees before making the decision to revert to salary sacrifice as an alternative way of making pension contributions

Employees sacrifice part of their salary. The amount being sacrificed is paid into an employee’s pension plan directly by you the employer, rather than being paid as a personal pension contribution.

As a result the employee’s salary is deemed to be lower and both you and your employee pay less National Insurance Contribution (NIC).  As part of the salary sacrifice deal the employer might pay none, some or all of their NIC saving into the employees’ pension along with the employee’s sacrificed pension contribution.

As an example:

An employee earns £30,000 a year and decides they want to salary sacrifice £1,000. Their new salary is £29,000, with the employer paying £1,000 to their pension plan. Both the employer and employee  pay less NIC because the salary is deemed to be lower.

The percentage of NIC saving the employer pays is defined by them as part of their salary sacrifice offer.  It could be anything between 0% and 100%.

The Advantages

The main employee advantages are:

  1. They pay less NIC because their income is lower; and
  2. They may receive a boost to their retirement fund because the employer may add a percentage of their NIC saving to your pension contribution.

The Disadvantages (to employees)

Salary sacrifice results in the HMRC recognising you have a lower salary. This could affect the following:

  1. Life cover - an employer may provide death in service, which is usually calculated as a multiple of an employee’s salary.  As their salary is lower under salary sacrifice it may affect their entitlement.  Some employers may continue to provide life cover at the pre-salary sacrifice pay.
  2. Mortgage borrowing - mortgage lenders usually calculate the maximum borrowing level as a multiple of salary. As the employee’s salary is lower under salary sacrifice the mortgage borrowing may be affected.
  3. Statutory Maternity Pay - SMP is available if an employee earns above the Lower Earnings Limit prior to going on maternity leave.  If salary sacrifice brings their salary below this level the entitlement to SMP may be lost.

Further Salary Sacrifice Guidance

HM Revenue and Customs publishes some information and guides on Salary Sacrifice.  These guides go into more detail into the effects of such an arrangement on state entitlements such as maternity pay, minimum wage, tax credits and other benefits. These guides can be found on their webpage here.

http://www.hmrc.gov.uk/specialist/salary_sacrifice.htm

What do Quest Financial Solutions do for you?

Before making any decision on salary sacrifice you should receive professional independent advice, should you make a decision without seeking advice on the basis of this article then Quest Financial Solutions do not accept any responsibility for your actions.

Sign up to our Newsletter