Salary Sacrifice Pension: Boost Your Pension and Cut Your Tax
-4 min read
Discover how a salary sacrifice pension scheme can increase your retirement savings while lowering your tax and National Insurance in the UK.
Even small adjustments in your pay structure have the potential to yield large gains for retirement. With the changeover of part of your salary into pension contributions-a process known as salary sacrifice-your pension pot could grow faster, with issuance of a lower tax bill.
What Exactly Is Salary Sacrifice?
It involves an exchange of salary cash for a non-cash benefit such as extra pension contributions.
- You give up a gross amount of salary.
- The amount is taken and paid into your pension benefit by your employer.
- The calculation of Tax and National Insurance will be based on this reduced amount. (Salary sacrifice and the effects on PAYE)
Pension Boosting Factors
- Higher Effective contribution:
- Your whole sacrificed amount goes in tax-free, which means you get outright tax relief at your highest rate.
- Employer Saving Passed On:
- Employers also save on their National Insurance bill and may increase their own contributions to the pension further. (Salary sacrifice and the effects on PAYE)
- Annual Allowance Cash Advantage:
- Any contributions made by salary sacrifice are classed as employer contributions and do not count towards the 100% of salary limit for personal contributions. (EIM42785 – HMRC Employment Income Manual)
Tax and National Insurance Benefits
- Income Tax: You decrease your taxable income, lowering tax payment amounts.
- National Insurance: Reduced salary means lower NICs for both you and the employer.
Who Gets the Salary Sacrifice?
- Employees participating in workplace pension schemes in which the employer provides salary sacrifice.
- Basic, higher and additional rate taxpayers all benefit—mainly, an added benefit to higher-rate taxpayer sacrifice contributors.
- Confirm with the payroll or HR department as to its availability and any variance regarding company rules.
Setting Up a Salary Sacrifice Scheme
- Contract Review: Your employer must amend your employment contract.
- Agree on Terms Decide how much salary is to be sacrificed by each pay period.
- Payroll Adjustments: Payroll makes changes to your payslip and contributions automatically.
For more information, visit GOV.UK's Salary sacrifice and the effects on PAYE.
Possible Disadvantages to Think About
- Impact on Statutory Benefits: Diminished earnings might affect maternity pay, for state pension calculations, or NICs accruable for benefit purposes.
- Minimum Wage Conformance: The sacrifice cannot reduce cash pay to below the minimum legal level.
- Scheme Exit Rules: Check whether you can amend contributions or stop them mid-year.
Next Steps
- Talk with HR or payroll about putting into place salary sacrifice.
- Use a pension calculator to see an example of what benefit would be in real terms to you.
- Confirm any impact on other benefits.
Get ready to find out how much you might be saving! Run a salary calculator and compare your take-home pay with pension growth under a salary compromise!