Salary Sacrifice
Often individuals will be considering their pension contributions as they have a long term goal for their retirement. One option is for employers to offer a salary sacrifice pension scheme. A salary sacrifice pension scheme enables individuals to boost their retirement savings whilst offering benefits for both the employee and employer.
Understanding Salary Sacrifice
Salary sacrifice is an arrangement between employees and employers which allows individuals to contribute a portion of their gross salary directly into their pension scheme before tax and National Insurance Contributions are deducted. An employee agrees to sacrifice a portion of their salary, typically this is either a percentage or a fixed amount, into their pension fund. The sacrificed portion of their salary is deducted from the employees gross salary before tax and National Insurance are deducted.
Benefits of Salary Sacrifice
Tax Efficiency
One of the key advantages of salary sacrifice for the employee is the tax savings. By sacrificing a portion of your gross salary, employees are reducing their taxable income resulting in lower income tax and National Insurance Contributions.
Boosted Employer Contributions
Employers may choose to offer to increase their contribution into the pension scheme as they will be saving on Employer National Insurance Contributions by the employee opting to sacrifice a portion of their salary.
Reduced Student Loan Repayments
If an employee has a student loan, salary sacrifice can reduce the student loan repayments that are payable as the student loan repayments are calculated on taxable income. Salary sacrifice will reduce your taxable income and in turn reduce the student loan repayments due.
Protected Pension Contributions
Salary sacrifice contributions are not impacted by any salary fluctuations. This ensures that employees continue to contribute to their pension even when there is a reduction in earnings, for example if an employee is being paid Statutory Payments.
Eligibility for Employees
Employer Offering
Salary sacrifice is an option which is offered by employers and it is the employers decision as to whether they choose to offer this to their employees.
Consent
Employees must volunteer to enter into a salary sacrifice arrangement and an employer cannot force an employee to participate.
Adequate Pay
An employee should take care in ensuring that after entering into the salary sacrifice pension arrangement they will still receive a net pay which will be sufficient for their financial requirements.
Overall salary sacrifice for pensions is a useful tool which employers can choose to offer their employees that can offer benefits to both the employee and employer. Employers should seek advice from their financial advisor on the options available to them.
Alice Chapple FCCA ACIPP
Senior Manager
Alice joined Evolution ABS in July 2013 after completing her A Levels at the Woodroffe School. She has completed her AAT with Richard Huish College, and was nominated for higher apprentice of the year in Somerset and finished in the top 3. Alice became a fully qualified Chartered Certified accountant in May 2018, and has since completed her Payroll Technician Certificate and oversees our payroll department.
In her spare time, she is an active member of Axminster Young Farmers, and enjoys being in the countryside and walking her two dogs. She also enjoys helping her family and her husband on their dairy farms in East Devon.