Wednesday, 17 April 2013

Salary sacrifice

Salary sacrifice is offered by some employers as a means for their employees to receive increased pension scheme contributions. This is not an effective way of saving for everyone so if you are offered salary sacrifice by your employer, make sure you benefit before signing up.

How it works

You sacrifice part of your salary. The amount you sacrifice is paid to your pension plan directly by your employer, rather than being paid to you.

As a result of you having a lower salary, both you and your employer pay less National Insurance Contributions (NIC). As part of the salary sacrifice deal, your employer pays all or pat of their NIC saving into your pension plan along with the sacrificed wages.

For example if you earn £30,000 per year and decide to sacrifice £1,000, your new salary is £29,000, with the employer paying £1,000 into your pension plan. You pay less NIC (and in some cases less Income Tax) because your salary is lower. Your employer also pays less NIC and pays a percentage of their savings into your pension plan.

The percentage of NIC saving your employer pays is defined by them as part of their salary sacrifice offer, it could be anything between 0% and 100%.

The advantages

The main advantages are:

  1. You pay less NIC (and in some cases less Income Tax) because your salary is lower; and

  2. You may receive a boost to your retirement savings because your employer may add a percentage of their NIC savings to your pension contribution.
 The disadvantages

Salary sacrifice results in you having a lower salary. This could affect the following.

  1. Life cover – your employer may provide you with life cover, which is usually calculated as a multiple of your salary. As your salary is lower under salary sacrifice, so may be your life cover. Some employers will continue to provide life cover at the pre-salary sacrifice rate.

  2. Refund of contributions – some occupational pension schemes offer a refund of employee contributions on leaving with less than two years service. The contributions made with a salary sacrifice arrangement are not employee contributions and therefore would not be refunded.

  3. Mortgage borrowing – mortgage lenders usually calculate the maximum borrowing level as a multiple of salary. As your salary is lower under salary sacrifice, your borrowing may be affected.

  4. Statutory maternity pay (SMP) – SMP is available if you earn above the Lower Earnings Limit (LEL, £5,564 in 2012/13) prior to going on maternity leave. If salary sacrifice takes you below LEL then you may lose your entitlement to SMP.

  5. State Second Pension (S2P) – this additional part of the state pension is calculated with reference to your earnings. Any reduction in your earnings between the Low Earnings Threshold (£14,700 in 2012/13) and the Upper Accrual Point (£40,040 in 2012/13) may affect this entitlement. In addition, if your salary falls below LEL then your entitlement to S2P may be lost.

If you require further guidance on the above, then feel free to give me a call, or check out the HM Revenue & Customs website for more information.


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