What is a salary sacrifice pension?

22 Jul 2022

Published in: Member News

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In simple terms, a salary sacrifice pension is an arrangement between employer and employee whereby the employee agrees to reduce their salary or pay by an amount equal to their pension contribution.

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What is a salary sacrifice pension?

New legislation was brought in to encourage employees to save for their pension in October 2012 known as Auto Enrolment. As an outsourced HR and payroll company, we have noticed very few of our clients use this tax break which could benefit both the employee and the employer.

Having spoken to several of our clients, it appears many don’t know what salary sacrifice is, how it works or how it could benefit them.

As a result, we’ve written a small number of articles that will break down salary sacrifice to bitesize articles, we will publish weekly.

So lets get started. What is a salary sacrifice pension? In simple terms, a salary sacrifice pension is an arrangement between employer and employee whereby the employee agrees to reduce their salary or pay by an amount equal to their pension contribution. The employer takes on the responsibility of pay paying the amount of salary the employee has sacrificed to the pension company.

As an example, an employee earns £20,000.00 per year. Ignoring auto-enrolment thresholds, the employee pays 5% of their salary or £1,000.00 per year into their pension. With a salary sacrifice arrangement, the employee would sacrifice £1,000.00 per year, giving them a new salary of £19,000.00 per year and pay tax and national insurance on this reduced salary. The employer would undertake to pay the £1,000.00 to the pension company together with the employer contribution.

The result of this arrangement is the employee would gain tax and national insurance relief through the payroll and the employer would pay reduced national insurance contributions. So this is the basic principle of how salary sacrifice works. In the next article, we will look at the individual stages of salary sacrifice.

If you want to know more about anything in this article, or are looking to move your payroll to a new outsourced payroll provider, get in touch. We are a friendly bunch and will be only too pleased to help you.