With salary sacrifice, you and your employer agree that you’ll give up part of your salary. In return, you can make larger contributions to your pension while paying less in national insurance (NI) contributions. Bear in mind, though, that it’s your NI contributions that count towards your state pension.
The part of the salary you sacrifice isn’t subject to income tax or national insurance when you pay it in. This can make it a very tax-efficient way to save. You might want to balance saving into a pension with ISA savings, to make the most of all the tax allowances available to you.
However, there are key differences between the 2 ways of saving. If you’re planning for the future, be sure to research whether investing in a pension or ISA is better for you.
Explore: What is an ISA?
The total minimum contribution for a workplace pension is 8% of your salary. Usually, you pay in 5% of this minimum amount while your employer pays in 3%.
Salary sacrifice is a tax-efficient way of paying more into your pension pot. You and your employer will first need to set up a salary sacrifice arrangement to reduce your salary. You’ll need to sign a new contract of employment to do this.
Here’s an example of how salary sacrifice works:
Salary sacrifice can help you support the lifestyle you want in retirement if you can afford the monthly reduction in salary.
As your salary is lower, your employer will also pay less in national insurance. In some cases, your employer might pay the national insurance savings into your pension.
Salary sacrifice might put you into a lower tax bracket.
This could mean you don't lose your personal allowance if your salary is above £100,000.
It could also mean you don't have to pay the high income child benefit charge if your salary is above £60,000.
There are potential drawbacks that you should consider.
In most cases, maternity and paternity pay is based on average weekly earnings. If your overall salary is reduced, you could receive less pay.
If you’re on a low income, you might not be able to use salary sacrifice to contribute to your workplace pension. It’s illegal for your employer to reduce your salary below the national minimum wage, even to boost pension contributions.
If you can afford to lower your salary, sacrificing this for a higher pension contribution from your employer can help you build your retirement funds quicker.
