Spotlight on Salary Sacrifice
Joseph Middleton
Independent Financial Adviser at GDA
What is Salary Sacrifice?
Salary Sacrifice is when you agree with your employer to lower your taxable salary in exchange for increased pension contributions.
Why Salary Sacrifice is in the Spotlight?
The largest tax rise in the budget was that employer’s national insurance contributions are increasing by 1.2% to a total of 15% on all employees earnings above £5,000.
Employers and employees do not pay national insurance or income tax on pension contributions made by Salary Sacrifice.
With these two facts in mind, Salary Sacrifice arrangements have become more attractive, and we expect employers to offer and encourage their use more and more.
Student loan repayments can also be reduced with salary sacrifice.
Examples of Salary Sacrifice in practice
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Take home pay = £25,119.60
Salary of £25,000 and employer pension contribution of £5,000
Take home pay is £21,519.60 + £5,000 in a pension.
Tax saving for employee in total = £1,400
An employee with a plan 5 student loan would save an additional £450 in student loan repayments.
Tax saving for the employer is 15% of £5,000 = £750
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Take home pay is £ 56,957.40
Salary of £75,000 + £5,000 employer pension contribution.
Take home pay of £ 54,057.40 + £5,000 in a pension
Employee Tax Saving = £2,100
An employee with a plan 5 student loan would save an additional £450 in student loan repayments.
Tax saving for employer 15% of £5,000 = £750
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Take home pay is £70,457.40
Salary of £100,000 + £5,000 employer pension contribution
Take home pay is £68,557.40 + £5,000 in a pension
Employee Tax Saving = £3,100
An employee with a plan 5 student loan would save an additional £450 in student loan repayments.
Employer tax saving = £750
Important notes regarding Salary Sacrifice
Pension contributions are important but should also be balanced and part of a thorough financial plan.
Pensions can’t be accessed until age 57 so do not use salary sacrifice if you will need to access the money in the short/medium term.
Salary Sacrifice can be more beneficial if you have children, and your salary is between £60,000 and £80,000 as it can help you reclaim lost child benefit at this salary level.
Salary Sacrifice can be more beneficial if you earn above £100,000 and have young children as it can help you requalify for free childcare support.
This article isn’t personal advice. If you’re not sure whether a course of action is right for you, ask for financial advice.
