This guide is for financial advisers only. It mustn’t be distributed to, or relied on by, customers. It is based on our understanding of legislation as at March 2024.
The most common method of using salary sacrifice is to keep the net take home pay the same, with an increased pension contribution after sacrifice.
Here’s how the numbers are crunched for an employee who is a higher rate taxpayer over age 25, earning £60,000 pa and paying an existing employee pension contribution of £2,400 pa gross (£1,920 pa net) into a personal pension. This example uses the following tax and NI rates for 2024/25 (this isn’t the complete set of tax and NI rates):
- income tax personal allowance = £12,570.
- basic rate tax = 20%.
- higher rate tax = 40%.
- employee NI = 10% on earnings between £12,570 and £50,270 plus 2% on earnings above £50,270.
- employer NI = 13.8% on earnings above £9,100.
The employee is assumed to be a rest of the UK taxpayer. Our calculator includes a question that asks if a person is a Scottish taxpayer. This is so that the correct tax rates and bands are used depending on whether an employee is a Scottish or rest of the UK taxpayer.
Figures before sacrifice
Income tax: £10,952. This is calculated as follows:
Basic rate tax plus higher rate tax, less the higher rate tax relief on the employee contribution
[(£50,270-£12,570) x 20% + (£60,000 - £50,270) x 40%) – (£2,400 x 20%)]
= (£7,540 + £3,892) - £480
= £10,952
Employee NI: £3,964.60. This is calculated as follows:
((£50,270 - £12,570 x 10%) + ((£60,000 - £50,270) x 2%)
= £3,770 + £194.60
= £3,964.60
Net pay: £43,163.40 which is calculated as:
| Salary | £60,000.00 |
|---|---|
| Less tax | -£10,952.00 |
| Less employee NI | -£3,964.60 |
| Les net employee pension contribution | -£1,920 |
| Net pay | £43,163.40 |
Amount of sacrifice calculation
To calculate the reduction in salary (i.e., the sacrifice amount) the annual net employee pension contribution is grossed back up to take account of basic rate tax and NI:
- For this example, £1,920 grossed back up will be £2,482.76 (based on 20% tax and 2% NI).
- assuming that all of the employer NI saving is added back in, the new employer pension contribution after sacrifice is:
£2,482.76 x 1.138 (100% employer NI saving) = £2,825.38 pa (£235.48 pm).
Figures after sacrifice
- On a gross salary of £57,517.24 (£60,000 - £2,482.76)
- Income tax: £10,438.90 = ((£50,270 - £12,570) x 20% + (£57,517.24 - £50,270) x 40%)
- Employee NI: £4,668.94 = ((£50,270 - £12,570) x 10% + (£57,517.24 - £50,270) x 2%)
- Net pay: £43,163.40 = £57,517.24 - £10,438.90 (tax) - £3,914.94 (NI)
| Salary | £57,517.24 |
|---|---|
| Less tax | -£10,438.90 |
| Less employee NI | -£3,914.94 |
| Les net employee pension contribution | -£0.00 |
| Net pay | £43,163.40 |
Cost to the employer
Before sacrifice
| Gross salary | £60,000 |
|---|---|
| Employer NI (calculated as (£60,000 - £9,100 x 13.8%) | £7,024.20 |
| Total cost to employer | £67,024.20 |
After sacrifice
| Gross salary | £57,517.24 |
|---|---|
| Employer NI (calculated as (£60,000 - £9,100 x 13.8%) | £6,681.58 |
| Annual gross employer contribution | £2,825.38 |
| Total cost to employer | £67,024.20 |
Summary
- ‘net take home pay’ stays the same before and after salary sacrifice (£43,163.40).
- there is an increased pension contribution (£2,400 pa gross employee contribution before sacrifice changes to £2,825.39 pa gross employer contribution after sacrifice).
- there is no extra cost to the employer or employee.
Note - not all calculators will show income tax and tax relief due in the same way, but the take-home pay should always be the same before and after sacrifice when the saving is being used to increase pension contributions.