You have a company pension scheme and you have enrolled your staff but have you ever heard of using a bit of “tax trickery” to reduce your cost? “Child-care vouchers” and the “Cycle to work scheme” are both examples of what we call “salary sacrifice” but why not extend this to your pension scheme and save some money?
The basics
Salary sacrifice is basically a method for employees and employers to save on national insurance contributions.
Employees agree to give up part of their salary (which is the sacrifice), which the employer then agrees to pay directly into their personal pension. As staff are effectively earning a lower salary, the employer and the employee both pay no national insurance on the sacrifice!
Advantages
An employees’ take home pay will increase when compared to deducting pension contributions separately.
As an employers’ national insurance rate is 13.8% and employees’ rate is 12%, structuring pension contributions in this way can save significant sums.
It is also a PERMANENT and ONGOING saving once it has been set up properly.
A worked example
Salary of £24,000 pa
Employee pension contribution of £1,200 per year
Employer pension contribution of £720 per year
To the Employer:
| Without sacrifice | With sacrifice | |
| Gross Salary | £24,000.00 | £22,800.00 |
| National Insurance due | £2,214.07 | £2,048.47 |
| Pension contribution | £720.00 | £1,920.00 |
| Cost to employer | £26,934.07 | £26,768.47 |
A permanent saving of £165.60 per year, per employee!
| To the Employee: | Without sacrifice | With sacrifice |
| Gross Salary | £24,000.00 | £22,800.00 |
| Income tax | £2,800.00 | £2,560.00 |
| National Insurance due | £1,925.28 | £1,781.28 |
| Pension contribution | £960.00 | £0.00 |
| Net pay | £18,314.72 | £18,458.72 |
A permanent increase in take home pay by £144 per year!
The Legal bit
Salary exchange can be set up at any point during a year.
However, the agreement must be in place before any salary is actually exchanged in order to comply with Her Majesty’s Revenue and Customs (HMRC) guidance otherwise HMRC may deem the exchange ineffective.
An ineffective salary exchange would require the employer to calculate income tax and NICs on the original gross salary and repay any difference directly to HMRC.
So how to set it up?
It is actually a very simple process!
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