What is a salary sacrifice pension?
Salary sacrifice is an alternative pension saving scheme. It is an agreement made between an employer and an employee involving a reduction to their earnings to receive a non-cash benefit, like pension schemes.
The employee agrees to reduce their earnings by an amount equivalent to their pension contribution, and the employer now pays the total pension contributions into their employee’s workplace pension. As your salary is now reduced, yourself and your employer begin paying less income tax and less National Insurance Contributions (NIC).
So, although your salary is lower, your employer now has more money to pay into your pension through reduced tax and NIC. Therefore, people enter salary sacrifice arrangements as they can be tax-efficient and reduce National Insurance, ultimately allowing for more money to be paid into a pension.
How to arrange a salary sacrifice pension scheme
A salary sacrifice arrangement must be agreed between the employer and the employee and must not reduce their earnings to below National Minimum Wage rates. You should also always be able to choose how much of your earnings you will sacrifice in exchange for pension payments.
This amount should also be adjustable; however, your employer may have set rules concerning salary sacrifice and how it is adjusted, so it’s a good idea to contact your HR or pension administrator to find out more about this.
Your employer should also always contact their workplace pension provider to ensure that a salary sacrifice pension arrangement is allowable.
Payment into a pension scheme is one of the few non-cash benefits from a salary sacrifice arrangement that do not need to be valued or reported to HMRC. This means that it is a relatively straightforward process and can hugely benefit the employer and the employee mutually.
Is a salary sacrifice pension scheme right for me?
Whilst salary sacrifice pension schemes can be a great help when saving toward your pension, it’s not for everyone. You should make sure you communicate with your employer and workplace pension provider before agreeing to sacrifice part of your salary.
As a result of enrolling in a salary sacrifice scheme, your annual salary will be lower. If you already have concerns about paying your bills or any other additional payments, a salary sacrifice arrangement may not be suited to you.
This is also the case if your annual salary is close to the National Minimum Wage. This would mean that you may not be able to qualify for a salary sacrifice pension scheme as it would be illegal to lower your annual salary.
How does this affect my state pension?
Agreeing to sacrifice your salary and receive a lower annual salary for an extended period could affect your state pension. To be considered eligible for the new State Pension, you’ll have had to have paid National Insurance Contributions for at least ten years. For the full state pension, this is 35 years.
For more information about claiming your state pension, visit the government website.