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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 the 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?
Note: Future Changes: As of April 6, 2029, a £2,000 limit on salary sacrifice for pensions will apply as announced recently.
The basics of Salary Sacrifice
Salary sacrifice is basically a method for employees and employers to avoid paying national insurance on some pay.
Employees agree to give up part of their salary (which is the sacrifice), which the employer then pays 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!
Benefits of salary sacrifice to the employER?
- Pay less in Employers National Insurance contributions (NIC). Employers rate currently 15% (2027/28 tax year)
- Improve your workplace benefits package
- Reinvest the money you’ve saved back into your business, pay it as extra contributions into your employees’ pension or a bit of both
- It is also a PERMANENT and ONGOING saving once it has been set up properly.
Benefits of salary sacrifice to the employEE?
- Most employees’ take-home pay will increase (when compared to not using salary sacrifice).
- Pay less in National Insurance contributions (NIC). Employees rate currently 8% (2027/28 tax year)
- It is also a PERMANENT and ONGOING saving once it has been set up properly.
- Lowering adjusted net income can help with child benefit eligibility or reducing tax traps.
Possible disadvantages:
- Lower salary might impact certain benefits, for example state pension eligibility, as it reduces taxable income.
- Mortgage applications which are based on earned income will usually take account of the lower salary – meaning some employees will have reduced lending ability.
Read more here:
Proposed changes from 06/04/2029:
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.
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