Salary Sacrifice & Pensions
How your employer can increase the value of your pension fund
Salary Exchange – The no cost way to increase your pension fund.
If you’re paying into your company pension scheme to provide for your retirement, you can take advantage of the benefits offered through salary exchange.
What is Salary Exchange?
Salary exchange is an arrangement between you and your employer in which you agree to give up part of your salary or bonus in exchange for your employer making payments into your pension plan.
What are the benefits?
You and your employer will both pay lower National Insurance Contributions (NICs) on your reduced salary. You may also pay less income tax.
As an employee, you can use your NIC and tax savings to increase your take home pay or increase your pension contributions.
Use our online calculator
Our online calculator shows the difference it can make to your pension fund at your chosen retirement date, if your employer agrees to invest their savings into your pension.
Some things to bear in mind
Before going ahead, you should be completely sure salary exchange is the right option for you. Reducing your salary through salary exchange involves making changes to your contract of employment and it is important to be aware of the implications this may have. Here are some of the things you will need to bear in mind
- The reduction in your salary could affect your entitlement to statutory benefits, such as child and working tax credit and statutory sick pay.
- Your entitlement to other salary-related benefits may also be affected. These could include bonusses, overtime pay and redundancy payments.
- Mortgage lenders usually base the amount they lend on the salary after exchange, which could mean that the maximum mortgage available to you is lower than it might otherwise be. To help avoid this, your employer can retain a notional salary for you (salary before exchange), as mortgage lenders may use this in their decision making.
- You cannot participate in salary exchange if it results in your salary falling below the national minimum wage or national living wage.
If you have any doubts regarding its suitability for you, we recommend that you seek financial advice. If you do not have a financial adviser, you can find one at www.unbiased.co.uk. You may be charged for financial advice.
This guide is based on our understanding of current tax laws. These laws and our understanding of them may change in the future. Tax treatment will depend on your individual circumstances and may be subject to change in the future.
Remember, the value of your pension can go down as well as up and is not guaranteed. You could get back less than has been paid in.
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How much can the employer save
The employer saves up to 13.8% of the amount paid by the employee into their pension.
EXAMPLE – employer savings
Based on average earnings of £30,4201
How much can an employer reduce their National Insurance Contributions liability?
|Number of employees||10||50||100||500|
|Potential Saving Per Year||£2,099||£10,495||£20,990||£104,950|
1Office for National Statistics April 2019
2Assumes that pensionable earnings are the same as average earnings
Pensionable Earnings – Definition
These examples are based on Basic Earnings as the defintion of pensionable earnings.
Other options are available, such as:
- Qualifying Earnings
- Monthly earnings below £520 or above £4,167 are ignored
- Total Earnings
How much can the employee save
The employee saves up to 12% of the amount they pay into their pension as a personal contribution
EXAMPLE – individual savings
John Smith has pensionable earnings of £2,000 per month
Employer pays 3% of earnings as a pension contribution
Employee pays 5% of earnings as a pension contribution
|Before Salary Sacrifice||After Salary Sacrifice|
|John's Pension Payment||£100||nil|
|Employer's Pension Payment||£60||£160|
|Total Pension Payment||£160||£160|
|John's take home pay1||£1,574||£1,587|
|Reduction in employer NIC2||n/a||£13.80|
1John’s take home pay increases by £12 per month. Alternatively, he could make an additional payment to his pension. Based on an adjusted personal allowance of £12,500 per annum
2Employer’s NIC liability is reduced by £13.80 per month. Alternatively, the employer could choose to pay this saving into the employee’s pension.