What is a Salary Sacrifice for Pension?

Salary Sacrifice

Got a salary hike recently? Congrats! 

What did you say? Are you worried about your increased tax burden? 

In all probability, you may not have ‘exercised’ one important means used by thousands of employees to minimize their tax burden. Yes, we are talking about ‘Salary Sacrifice for Pension’If you are not sure about what it can bring to you, go through this blog. Here, we will tell you what Salary Sacrifice for Pension is and will also answer some common queries related to it.

Here we go!

The scheme of ‘Salary sacrifice’ is based on giving up a part of your salary so that you can claim extra benefits from your employer.  This option is usually offered by an employer as a part of his pension scheme.  With this, you can make the saving on your pension more tax-efficient and can also increase your take home pay. If you choose the Salary Sacrifice for Pension option, both you and your employer agree to reduce your salary. Your employer will pay the differential amount into your pension, in addition to their contribution to the pension scheme. Now, as you are effectively earning a lower take home salary, both you and your employer would pay lower NICs (National Insurance contributions), leading to an increase in your take home pay.

Thus, a Salary Sacrifice for Pension enables you to use the money saved on income tax and National Insurance Contributions to add to your pension and increase its value over a period of time. As you have made significant savings, pension contributions made in this manner are considered more tax efficient than the normal personal contributions you will otherwise add to your pension. With this, you can make either the same contribution at a lower overall cost or a higher contribution at the same overall cost

Read More-: How to Pension Re-enrolment in Sage 50

Please Note that all employees may not qualify for the Salary Sacrifice for Pension option. If you are on a low wage already, it may not be possible to further reduce your earnings. Your earnings should be above the national minimum wage limit after availing of such types of contributions. If you opt to avail of the Salary Sacrifice for Pension option, it should be established through a contractual agreement with your employer. If you wish, you can opt out of this scheme at any time, provided all your outstanding balances are paid. Salary Sacrifice for Pension scheme is quite popular these days as it comes with no additional cost to you or your employer and it is coupled with several tax benefits for both the parties involved.

What are the advantages of the Salary Sacrifice for Pension Scheme?

There are quite a few advantages of opting for the  Salary Sacrifice for Pension scheme. Some of them are mentioned below-

  • Ensures Faster Growth of your Pension Fund

Opting for this fund ensures that your employer makes a higher contribution towards your pension fund every month. Hence, sacrificing a part of your salary is a quicker method of growing your pension accumulation.

  •  Helps you Save on NIC and Income Tax 

The NIC and Income tax deducted from your pay is calculated on your earnings. Therefore, by lowering your salary, you can lower your income tax and NI deductions as well.

  • Additional Tax Benefits

Please note that the amount from your salary sacrificed on the Pension scheme is exempted from income tax or NI contributions. On the other hand, a standard pension tax relief scheme can lower your income tax only. It can’t reduce your NI contributions.

Is there a limit to how much you can Sacrifice on this Scheme?

There is no specific limit set for the amount you can sacrifice from your salary and contribute to this scheme. 

However, you should make sure that your earnings should be above the national minimum wage limit after you have sacrificed a certain amount from your salary. This means, that if you are on a low wage already, it may not be possible to further reduce your earnings. The bottom line is-your salary has to remain above the national minimum wage, all the time.

Moreover, you need to keep in mind that you can contribute up to a maximum of £40,000 annually, combining all your pension savings. This includes employer contributions as well. Therefore, you need to make sure that your salary sacrifice does not push your total pension contribution over this prescribed limit. At times, your chosen pension provider may also prescribe limits of minimum and maximum contributions.

Is there any disadvantage of the Salary Sacrifice for Pension scheme?

Like any other tax-saving scheme, Salary Sacrifice for Pension also has its fair share of drawbacks. Here, we are mentioning some of these-

  • Any life cover provided by your employer is calculated as a multiple of your salary. Therefore, if your salary gets reduced after opting for the Salary Sacrifice for Pension scheme, your employer may provide less life cover. Before sacrificing a part of your salary, it is better to discuss with your employer the possible impact of the salary sacrifice deduction on the life cover being offered to you.
  • If your salary gets reduced after opting for the Salary Sacrifice for Pension scheme, the lower salary may impact the amount of money you can borrow for a mortgage. 
  • If you are availing of a defined benefit scheme and you opt out of it within the first two years, you may not get a refund of your contributions. This is due to the fact that any salary sacrifice contribution would be considered an employer contribution.
  • If you are availing of a defined contribution scheme, you can get a refund of your contributions only if you opt out of the scheme within 30 days of joining. This is because these contributions are made by your employer and if you opt out/leave after 30 days, you will remain invested. You will not be allowed to access the money till you attain the age of 55.
  • Your lower salary may affect your entitlement to certain State benefits (Statutory Maternity Pay etc) 

Read Also-: Excise Tax The Ultimate Guide for Small Businesses

Keep in Mind the following Points

When your employer offers a salary sacrifice arrangement, please keep in mind the points below, before opting for the Salary Sacrifice for Pension scheme-

  • Your employer should provide you with an overview of how the salary sacrifice would affect you 
  • The employer must inform you whether they would pay a part or all of the NICs they save into your pension fund.
  • You should ask your employer to calculate how the sacrifice would affect your take home salary. If you do not think you will get enough benefits, you may choose not to go ahead with this scheme.

We hope, from the discussion above, you may have got a fair idea of what a Salary Sacrifice for Pension is. We have also discussed the advantages and disadvantages associated with this scheme. From this, you would be able to make informed decisions regarding whether you should opt for this scheme or not.

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💠Frequently Asked Questions💠

What is the difference between a Salary Sacrifice Pension and Auto-Enrolment?

As per the prevailing law, it is mandatory for an employer to auto-enroll its employees into a pension scheme provided at the workplace. All employees between the ages of 22 and the prescribed state pension age and who earn an annual income of £10,000 get enrolled into this scheme automatically. However, the employees may decide to opt out of this scheme.
On the other hand, the Salary sacrifice pension is provided entirely at the discretion of the employer. If provided, the employees may decide to join or opt out of this scheme.  It is a completely voluntary scheme and the employees can opt out at any time. If an employee chooses the Salary Sacrifice for Pension option, both he and his employer agree to reduce his salary. The employer will pay the differential amount into the pension of the employee, in addition to their contribution to the pension scheme.

Does Salary Sacrifice affect State Pension?

Your state pension is calculated on your NI contributions. As you end up paying less NI by opting for a salary sacrifice for the pension scheme, it may impact your state pension in a particular scenario. This is likely to happen if your salary is reduced to an extent that you will earn below the threshold to make NI contributions (less than £183 in a week, approximately).

What is the Maximum limit till which you can sacrifice from my Salary to contribute to the Salary Sacrifice Pension Scheme?

There is no specific limit set for the amount you can sacrifice from your salary and contribute to this scheme. However, you should make sure that your earnings should be above the national minimum wage limit after you have sacrificed a certain amount from your salary. This means, if you are on a low wage already, it may not be possible to further reduce your earnings. 
Moreover, you need to keep in mind that you can contribute up to a maximum of £40,000 annually, combining all your pension savings. This includes employer contributions as well. Therefore, you need to make sure that your salary sacrifice does not push your total pension contribution over this prescribed limit. At times, your chosen pension provider may also prescribe limits of minimum and maximum contributions.

How can the Salary Sacrifice Pension Scheme save Money for the Employers?

When an employee gives up a part of his salary through a salary sacrifice scheme, he will end up paying less tax and NIC (National Insurance Contribution) on his gross earnings. His employer can also save money in this as they will no longer need to pay the Employers’ NIC against the part of the salary sacrificed by the employee.

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