Salary Sacrifice (also known as Salary Exchange) is an alternative way of paying pension contributions. It is a route for employers to legitimately reduce their National Insurance (NI) bills whilst also providing either increased take home pay or pension contributions for employees.
Salary Sacrifice involves an agreement between the employer and an employee to change the terms of their employment contract to reduce their annual salary in exchange for pension contributions.
By adopting salary sacrifice instead of deducting employee contributions from net salary, the employee is effectively earning a lower salary. A basic rate tax payer will save 12% NI and the employer will save 13.8% NI of the employee contribution. This means it is more valuable to both parties than paying pension contributions from net salary.
The employer can pay a percentage of their saving as a pension contribution or can retain the whole saving.
Salary sacrifice schemes are officially recognised by HMRC (there is guidance on their website as to how they operate).
The benefits eligible for salary sacrifice are set to be restricted, as announced in the Autumn Statement in 2016, including mobile phones, company cars and health checks. However, for the more essential benefits, such as pensions and childcare, salary sacrifice is here to stay and effectively using such arrangements can make a significant difference to your finances.
If you are operating a pension scheme for your employees, and you’re not currently using salary sacrifice arrangements, please do get in touch to discuss how this method can implemented to improve your business.