Tax treatment depends on your circumstances and is subject to change
This is a simple idea that really works well. And, whilst sacrificing anything sounds rather painful, it’s actually the polar opposite! With salary sacrifice, you voluntarily give up part of your gross salary before tax in exchange for a non-cash benefit, such as a pension contribution. Your employer then pays the contribution to your pension on your behalf. As your overall pay is lower, you pay less income tax and national insurance payments. What’s not to like?
You and your employer must agree to a change to your terms and conditions of employment in order for you to sacrifice some salary (or perhaps even a bonus if you get one). You then choose how much pay you want to exchange for a pension contribution, which your employer then pays into your pension scheme along with their contribution. This arrangement must be in place before you are actually paid, you can’t decide to do it afterward. Although, salary sacrifice can be set up at any time, even after you started your pension.
You’ll still get the tax relief from the government you’re entitled to, which is always a nice boost to your pension. You’ll also save National Insurance (NI) contributions on the pay you give up. A win, win! Your employer will decide how your NI savings will be used.
They could decide to:
Your employer also saves money and can offset their pension payments against their business costs. They’ll also save on the employer NI contributions for the pay you give up. Some employers will use the savings to boost your pension contributions, or perhaps even to offset other costs such as running the pension scheme and other employee benefits they provide.
Salary sacrifice, sometimes also referred to as Smart pensions, is a legally binding agreement, although you can opt out after you’ve started. In some cases, you might automatically be included. In other arrangements, you have to sign up. Either way, you can opt out, for what are often called ‘lifestyle changes’ e.g. marriage, or the birth of a child.
Salary sacrifice might not be right for you, perhaps due to your salary level and it could impact the following which are related to your salary level and NI contribution-based benefits:
Your employer will typically communicate to you about any impact of your salary sacrifice scheme on benefits that are linked to your salary such as death-in-service and ill health schemes, redundancy payments and overtime rates. For the overwhelming majority of people though, salary sacrifice is really good news and will make a positive difference to either your take home pay, pension contributions, or both. A reference salary, effectively your pre sacrifice salary, is used to decide pay rises etc and for other things like mortgage lending so you don’t lose out by being in the scheme.
We can help you to make the best possible decisions when it comes to your pension.
Taking pension money early is not right for everyone as it will leave you worse off in retirement. Also, tax treatment depends on your circumstances and is subject to change. That’s why it makes sense to get help from a regulated specialist.
