Salary Sacrifice

[KittenCatt]

In simple terms, will you explain what salary sacrifice is in relation to pensions please?

I believe the salary sacrificed sum is taken from your gross salary before your pension contribution.
So your pension will be less as you’ve contributed less and so has your employer. This would affect your pension more if it’s a large amount e.g. for a car and you do it for a prolonged period.

I'm reading the question as relating to sacrificing salary with the sacrificed pay going into the pension:

https://getpenfold.com/employer-tools/salary-sacrifice-pensions-explained

Salary is less, not pension!

You earn £x gross. Your pension £p contribution is taken out of your gross salary of £x. You then pay tax and NI on what is left which is £x - £p.

In other words your pension reduces the amount of taxable income. The other way of doing it is to pay tax on the full amount, then pay your pension, then claim the tax relief because you've paid tax already on the contribution.

It is worth renewing that you cannot salary sacrifice below minimum wage.
Although you can make additional payments into a SIPP with relevant earnings.

Basically you pay money into your pension before it is taxed. This means that money you would have paid in tax and NI effectively goes into your pension instead.

So you sacrifice (say) £1,000 into your pension and it all goes in. But it only costs you the after-tax/NI amount, say £700 (round numbers not exact).

It doesn’t save tax as you get tax relief with non salary sacrifice anyway, it’s just in a different way, the monetary saving to you is the national insurance that you would have paid on the amount sacrificed, the employers also saves the employers ni so may or may not give this extra to your pension

Officially, your salary reduces by the amount you sacrifice. So you pay income tax at the rate appropriate to your reduced salary.

The full amount sacrificed goes to your pension (rather than paying tax on it).

More ends up in both your pay packet and your pension pot (company may also pay more as they're saving on your NI).

Generally seen as a good thing, however i think if you're still paying off a student loan it isn't as straightforward.

Your pension provider should have taken you through this so you can make an informed decision. Ask them to clarify for your individual situation.

If your gross salary is 2500 per month (£30k annual) and your pension contribution is 5%
£125, your tax & NI will be based on £2375 instead of £2500. Your employer will save NI as well. (May or may not share the saving/put it into your pension pot)

However bear in mind - credit lenders will most likely use the lower figure as a multiple as if you earned £28.5k not £30k if that is relevant.

@JaneKatSuttonGoals we wouldn't take the lower figure in mortgages
So many people have pension deducted via SS and we still lend based on their gross

@Jmaho good to know - we were told it could be when they introduced salary Sacrifice for pensions.
What about something like a car?

We would take a car deduction into account but never pension

I'm an accountant in an organisation, and have worked heavily in payroll and benefits design.

Salx (salary sacrifice / exchange) means that you legally agree to give up some salary in exchange for your employer making additional contributions on your behalf. Eg if your salary is £25k you agree for it to be £23k and your employer pays £2k into your pension instead of as salary.

Pension contributions are ALWAYS tax efficient (saving income tax) but doing them as salx also makes them NI efficient (saving NI).
A basic rate tax payer will save 20% tax on non salx contributions but 32% on salx contributions.

Eg £100 gross pension contribution will "cost" £80 vs £68 for salx from net pay. Your employer saves NI as well so there's a benefit for them too.

For a higher rate tax payer the NI saving is lower at 2%.

But there may be other consequences on pension, SMP as the result of sacrificing pension so although there is an obvious benefit you should always consider your circumstances.

@scrunchmum the ees ni savings has gone down to 10% from jan

Also you have issues if you go below the tax limit of £12,500, as then things like gift aid fail and if you do any you need to do the extra tax.

In theory things like a mortgage may be harder to get if you have a low taxable income but my payslips show pre and post salary sacrifice so it should be easily understood. But if they just looked at my bank account net pay they'd assume I was on a lot less.

Thanks you're right, I was thinking it was April. In my defence I'm on maternity leave so out of it day to day and I was in the middle of a long night feed 😂

So in reference to my post it's 30% instead of 32% and therefore 70% net instead of 68%.

No change to higher rate band.