Pension salary Sacrifice is a written agreement between employee and employer. The employee agrees to give up an amount of their gross salary in return for an employer pension contribution of the same amount.
Pension Salary Sacrifice & Exchange
Saving Employees and Employers National insurance
When an employee uses this policy, their sacrificed salary is taken before they are paid and is added to the pension scheme straight away. This means neither the employee or the employer pay National Insurance Contributions (NICs) on the amount exchanged. This generally works in a similar way to other salary sacrifice benefits like the cycle to work scheme or electric car leasing.
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How the Salary Sacrifice/Exchange Process Works
- Draft a salary sacrifice document (getting help from a solicitor to ensure its compliance is vital).
- Offer your employees the opportunity to opt into the scheme.
- Their gross salary is then reduced by the agreed amount and this money is then paid into their workplace pension plan by the employer.
- If you need assistance working out if salary sacrifice is right for your business then please do arrange a free of charge consultation with one our Solicitors and Independent Financial Advisers.
How Salary Exchange Benefits Employers
- As your employees will have lower pretax salaries, you won’t have to pay as much national Insurance.
- You can very easily work out how much you will save by adding up the amount employees are exchanging and then multiplying it by 13.8% (or 15.0% from April 2025).
Here is an example:
| Average Employee Salary | £40,000 |
|---|---|
| Average Employee Contribution Rate | 5% / £2,000 |
| Employees | 20 |
| Total sacrificed | £40,000 (20 employees sacrificing £2,000 each) |
| Employer NIC Rate | 13.8% |
| Annual Employer NIC saving | £5,520 |
How Salary Exchange Benefits Employees
Employees will benefit from reduced NICs by exchanging their normal workplace pension contribution. This saving can be used to enhance their pension contribution or increase their take home pay.
Here is an example of how it can increase their Net Income:
| Before Salary Sacrifice | After Salary Sacrifice | |
|---|---|---|
| Gross Salary | £50,000 | £47,500 (£2,500 Sacrifice) |
| Employee Pension Contribution | £2,500 | £0 |
| Employer Pension Contribution | £1,500 | £4,000 (original £1,500 + sacrificed £2,500) |
| Total Pension Contribution | £4,000 | £4,000 (Same amount) |
| Employee NICs Paid | £2,994 | £2,794 (£200 less) |
| NET Income | £37,520 | £37,720 (£200 more per year) |
Other employees may wish to sacrifice a much larger amount, the main reason of doing so would be to save more aggressively for retirement or to reduce their net adjusted income to preserve benefits like free childcare or to mitigate their personal allowance being tapered down.
Here is an example of how an employee in that situation would sacrifice their salary.
| Before Salary Sacrifice | After Salary Sacrifice | |
|---|---|---|
| Gross Salary | £120,000 | £100,000 (£20,000 Sacrifice) |
| Employee Pension Contribution | £6,000 | £0 |
| Employer Pension Contribution | £3,600 | £23,600 (original £3,600 + sacrificed £20,000) |
| Total Pension Contribution | £9,600 | £23,600 (£14,000 more) |
| Income Tax Paid | £35,832 | £27,432 (£8,400 less) |
| Employee NICs Paid | £3,611 | £3,521 (£80 Less) |
| NET Income | £73,757 | £68,557 (£5,196 less per year) |
- This employee effectively gets an additional £14,000 put in their pension scheme in return for reduction of £5,196 in their net income.
- The employee may also retain benefits like free childcare can be valued at up to £7,000 per child they have.
- On top of this the employer would see a reduction in their national insurance bill of £2,780 at the moment and £3,000 from April 2025.
The Potential Downsides of Salary Sacrifice for Employers
- Salary sacrifice can be free of charge if you use an online template, however these are fraught with issues. They do not explain the benefits for employees and often are not rolled out using the proper procedures. At the end of the day Salary Sacrifice is a change to an employee’s contract, so great care should be taken.
- Implementing salary sacrifice may increase burden on your finance and HR teams. Employees may ask a lot of questions and getting documents signed and filed correctly can be time consuming.
The Potential Downsides of Salary Sacrifice for Employees
- Having a lower salary could see a reduction in employee benefits when they are worked out using a multiple or percentage of gross salary e.g. life assurance or income protection.
- Entitlement to certain benefits like statutory maternity leave could be affected.
- Some Mortgage lenders may assess your affordability differently. Employees must have proper explanation and full understanding before opting into the scheme.
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