Salary sacrifice - basic rate taxpayer example

These FAQs are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of legislation at the date of publication.

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The most common method of using salary sacrifice is to keep an employee's net take home pay the same, with an increased pension contribution after sacrifice. This is the ‘KEEP NET INCOME CONSTANT’ option on Aegon’s online salary sacrifice calculator, which is held here. Using this option, here’s how the numbers are crunched for an employee who is a basic rate taxpayer over age 25, earning £24,000 pa with an existing 5% pension contribution (£100 per month gross, £80 per month net) being paid into a personal pension. This example uses the following UK tax and NI rates for 2018/19 (this isn’t the complete set of tax and NI rates):

  • income tax personal allowance = £12,500. 
  • basic rate tax = 20%.
  • employee NI = 12% on earnings between £8,632 and £50,000.
  • employer NI = 13.8% on earnings above £8,632.

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.

Income Tax: £2,060. This is calculated as follows:

Basic rate tax less the tax relief on the employee contribution

[((£24,000 - £12,500) x 20%) – (£1,200 x 20%)]

= £2,300 - £240

= £2,060

Employee NI: £1,844.16. This is calculated as follows:

((£24,000 - £8632) x 12%)

Net pay: £18,895.84, which is calculated as:

Net pay
Salary £24,000.00
Less tax -£2,060.00
Less employee NI -£1,844.16
Less gross employee pension contribution -£1,200
Net Pay = £18,895.84

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:

  • £960/0.68 (20% tax + 12% NI) = £1,411.76.
  • assuming that all of the employer NI saving is added back in, the new employer pension contribution after sacrifice is:
  • £1,411.76 x 1.138 (100% employer NI saving) = £1,606.58 pa (£133.88 pm).

On a gross salary of £22,588.24 (£24,000 - £1,411.76)

Income tax: £2,017.65 = ((£22,588.24 - £12500) x 20%)

Employee NI: £1,674.75 = ((£22,588.24 - £8,632) x 12%)

Net pay: £18,895.84, which is calculated as:

Net pay
Salary £22,588.24
Less tax -£2,017.65
Less employee NI -£1,674.75
Less gross employee pension contribution -£0.00
Net Pay = £18,895.84
Before Sacrifice
Before Sacrifice
Gross Salary £24,000
Employer NI (calculated as (£24,000 - £8,632) x 13.8%) £2,120.78
Total cost to employer £26,120.78
After Sacrifice
After Sacrifice
Gross Salary £22,588.24
Employer NI (calculated as (£22,588.24 - £8,632) x 13.8%) £1,925.96
Gross employer contribution £1,606.58
Total cost to employer £26,120.78
  • net take home pay’ stays the same before and after salary sacrifice (£18,895.84).
  • there is an increased pension contribution (£100 pm gross employee contribution before sacrifice changes to £133.88 pm gross employer contribution after sacrifice).
  • there is no extra cost to the employer or employee.

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