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Salary Sacrifice

How can you achieve an increase in your take home pay and boost pension contributions at the same time?  And what about enhancing employee benefits at no additional cost to the business?

Salary sacrifice (also known as salary exchange) provides a positive answer to both these questions and is one of several options available to employers seeking to make their pension schemes cost effective while still remaining attractive to employees. 

Salary sacrifice is an agreement between employee and employer to take a reduction in future salary or forfeit part of a future bonus, thus saving on the amount of Income Tax and National Insurance contributions (NIC) payable by both parties. 

By ‘recycling’ a sum equivalent to the contributions on the sacrificed amount, the employer is able to make an increased contribution to the employee’s pension. In addition, the employee’s take home pay actually increases by virtue of their being required to pay less tax and NIC on the new, lower salary.

Reinvesting employer NIC savings provides the greatest benefit to employees but there are other options in addition to the scenario outlined above, some of which actually decrease employer costs while still affording increases in employees’ take home pay or pension contributions.

Salary sacrifice arrangements can be set up in a number of different ways so long as the employee’s pension scheme accepts employer contributions. Contracted-out arrangements are not conducive to salary sacrifice but the scheme can be used with

• Occupational contracted-in money purchase schemes
• Group personal pensions
• Personal pensions
• Group stakeholder pensions
• Individual stakeholder pensions
• Executive pension plans

A formal alteration of the employee’s contract will be necessary in order to reflect the new arrangement, but there are no additional costs for employers. Schemes must be set up well in advance of any sacrifice taking place and will last for an amount of time specified by the employer (usually 12 months).  The employer can also include a ‘lifestyle changes’ option which would come into force if the employee’s circumstances altered in any way as defined by the terms of the agreement.

Anyone considering salary sacrifice should be aware that while higher pension contributions create the potential to retire earlier or increase income in retirement, there may be an impact on salary-linked benefits and certain state benefits which are based on NICs. Mortgage/loan applications may also based on the lower salary figure.

Link www.hmrc.gov.uk/specialist/salary_sacrifice.htm

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