This is for financial advisers only. It mustn’t be distributed to, or relied on by, customers. It is based on our understanding of legislation as at 1 November 2024.
The challenge for employers, with the help of their advisers, is to educate and remind employees that employer pension contributions are not a taxable benefit subject to income tax and national insurance (NI), and so it is possible for them to;
- pay a lower gross salary and a higher pension contribution for their employees, or
- maintain the same pension contribution and increase the take-home pay of their employees.
While the employee sacrifices some of their gross salary, they’ll see an increase in the pension contribution being made or an increase in their take-home pay - depending on how the salary sacrifice is structured.
The scenarios below for the 2024/25 tax year show how a salary sacrifice arrangement, based on a UK tax payer rather than Scottish tax payer, could work in practice and will help employers and employees decide whether such a scheme would benefit both parties.
This information is based on our understanding of current taxation law and HMRC practice, which may change. The value of the reduction in tax and National Insurance will depend on the employee’s individual circumstances. Not all salary sacrifice options suit every member, see our checklist for more information.
Keep the pension contribution constant, in other words increase the take-home pay
Basic rate example: The employee sacrifices some of their gross salary so that, after sacrifice, the personal contribution is altered to an employer contribution of the same amount and the employee’s take-home pay is increased. Assume a 40-year-old employee is earning £30,000 a year (so is a basic rate taxpayer) and is contributing £150 a month as a personal contribution before salary sacrifice. Simply using salary sacrifice means they can increase their take-home pay by £301 each year while maintaining the same pension contribution, which switches to being paid by the employer after sacrifice.
This is a result of paying less tax and NI on the reduced salary after sacrifice of £28,418. There’s no additional cost to the employer who’s chosen to pass on the full benefit of the (13.8%) NI saving to increase the employee’s take-home pay.
|
Before sacrifice |
After sacrifice |
|---|---|---|
Employee gross salary |
£30,000 |
£28,418 |
Employee take-home pay |
£23,680 |
£23,981 |
Pension contribution |
£1,800 a year gross paid by the employee (including tax relief) |
£1,800 a year gross paid by the employer |
Cost to the employer |
£32,884 |
£32,884 |
Higher rate example: The employee sacrifices some of their gross salary so that, after sacrifice, the personal contribution is altered to an employer contribution of the same amount and the employee’s take-home pay is increased. Assume another employee is earning £60,000 a year (so is a higher rate taxpayer) and is contributing £300 a month as a personal contribution before salary sacrifice. Simply using salary sacrifice means they can increase their take-home pay by £326 each year while maintaining the same pension contribution, which switches to being paid by the employer after sacrifice.
This is a result of paying less tax and NI on the reduced salary after sacrifice of £56,837. There’s no additional cost to the employer who’s chosen to pass on the full benefit of the (13.8%) NI saving to increase the employee’s take-home pay.
|
Before sacrifice |
After sacrifice |
|---|---|---|
Employee gross salary |
£60,000 |
£56,837 |
Employee take-home pay |
£43,197 |
£43,523 |
Pension contribution |
£3,600 a year gross paid by the employee (including tax relief) |
£3,600 a year gross paid by the employer |
Cost to the employer |
£67,024 |
£67,024 |
Keep the employee’s take-home pay constant, in other words increase the pension contribution
Basic rate example: The employee sacrifices some of their gross salary so that, after sacrifice, the personal contribution is altered to an increased employer contribution and the employee’s take-home pay stays the same. Assume a 40-year-old employee is earning £30,000 a year (so is a basic rate taxpayer) and is contributing £150 a month as a personal contribution before salary sacrifice. Simply using salary sacrifice means they can increase the pension contribution being made by £39.67 per month while keeping their take-home pay the same.
This is a result of paying less tax and NI on the reduced salary after sacrifice of £28,000. There’s no additional cost to the employer who’s chosen to pass on the full benefit of the (13.8%) NI saving to increase the overall pension contribution, which switches to all being paid by the employer after sacrifice.
|
Before sacrifice |
After sacrifice |
|---|---|---|
Employee gross salary |
£30,000 |
£28,000 |
Employee take-home pay |
£23,680 |
£23,680 |
Pension contribution |
£1,800 a year gross paid by the employee (including tax relief) |
£2,276 a year gross paid by the employer |
Cost to the employer |
£32,884 |
£32,884 |
Higher rate example: The employee sacrifices some of their gross salary so that, after sacrifice, the personal contribution is altered to an increased employer contribution and the employee’s take-home pay stays the same. Assume another employee earns £60,000 a year (so is a higher rate taxpayer) and is contributing £300 a month as a personal contribution before salary sacrifice. Simply using salary sacrifice means they can increase the pension contribution being made by £53.16 a month while keeping their take-home pay the same.
This is a result of paying less tax and NI on the reduced salary after sacrifice of £56,276. There’s no additional cost to the employer who’s chosen to pass on the full benefit of their (13.8%) NI saving to increase the overall pension contribution, which switches to all being paid by the employer after sacrifice.
|
Before sacrifice |
After sacrifice |
|---|---|---|
Employee gross salary |
£60,000 |
£56,276 |
Employee take-home pay |
£43,197 |
£43,197 |
Pension contribution |
£3,600 a year gross paid by the employee (including tax relief) |
£4,238 a year gross paid by the employer |
Cost to the employer |
£67,024 |
£67,024 |
In each scenario the cost to the employer of employing the employee remains the same before and after sacrifice.
Salary sacrifice can benefit some people and can also be a very useful financial planning tool.
For example, dropping someone’s salary can put them below an income tax threshold, reducing the amount they pay in tax. It could also move them under the £50,000 threshold for child benefit or the £100,000 threshold for retaining the income tax personal allowance.
However, a lower salary could impact the mortgage borrowing someone could secure, reduce death in service benefit entitlement, and impact eligibility for state benefits.
Therefore, assessing a client’s individual circumstances and how a salary sacrifice arrangement would affect them is an essential part of the advice process.
The important point is that there’s a valuable discussion for employees to have with their financial adviser about the risks and benefits of using salary sacrifice for pension savings.