Salary Sacrifice: How It Works and the Pension Tax Advantages
For many employees, salary sacrifice can improve the overall value of workplace pension contributions.
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For many employees, salary sacrifice can improve the overall value of workplace pension contributions. However, it is important to understand how the arrangement works, who can benefit most, and the potential trade-offs before deciding whether it is right for you.
This guide explains salary sacrifice pension arrangements, the tax advantages they can offer, and the key considerations to keep in mind.
What Is Salary Sacrifice Pension and How Does It Change Your Contract
A salary sacrifice pension arrangement is a formal agreement between you and your employer.
Under the arrangement, you agree to reduce your contractual salary by a specified amount. In exchange, your employer agrees to pay that amount directly into your pension as an employer contribution.
This means the pension contribution is no longer treated as an employee contribution. Instead, it becomes an employer contribution made on your behalf.
| Without Salary Sacrifice | With Salary Sacrifice |
|---|---|
| Salary: £40,000 | Contractual salary: £38,000 |
| Employee pension contribution: £2,000 | Employer pension contribution: £4,000* |
| Without Salary Sacrifice | Salary: £40,000 | Employee pension contribution: £2,000 |
|---|---|---|
| With Salary Sacrifice | Contractual salary: £38,000 | Employer pension contribution: £4,000* |
Important Considerations Before Choosing Salary Sacrifice
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Reduced contractual salary may affect mortgage affordability and certain salary-related benefits.
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Statutory payments, such as Statutory Maternity Pay or Statutory Sick Pay, may be affected depending on your circumstances.
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Employer policies vary, so not every employer shares their National Insurance savings through additional pension contributions.
Reduced contractual salary may affect mortgage affordability and certain salary-related benefits.
Statutory payments, such as Statutory Maternity Pay or Statutory Sick Pay, may be affected depending on your circumstances.
Employer policies vary, so not every employer shares their National Insurance savings through additional pension contributions.
Lower earners may not be able to participate if salary sacrifice would reduce earnings below the National Minimum Wage.
