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.29 March 2022 Back to results
The most common way to use salary sacrifice is to keep an employee’s net take home pay the same while increasing the pension contributions after sacrifice. Here’s how the numbers are crunched for this option, for an employee who is a basic rate taxpayer over age 25, earning £24,000 pa with an existing 5% pension contribution (£1,200 pa gross, £960 pa net) being paid into a personal pension. This example uses the following UK tax and NI rates for 2022/23 (this isn’t the complete set of tax and NI rates):
- income tax personal allowance = £12,570.
- basic rate tax = 20%.
- employee NI = 13.25% on earnings between £11,908 and £50,270.*.
- employer NI = 15.05% on earnings above £9,100*.
*National insurance rates are going up by 1.25% for employees and employers from 6 April 2022 in advance of the introduction of the Social Care Levy. In addition, the chancellor announced in his spring statement on 23 March 2022 that the National Insurance Primary Threshold (PT) used in the calculation of employee NI contributions will be increased from 6 July 2022 to help alleviate the increased cost of living. This example uses a pro-rated PT for the whole year and takes the new increased employee and employer NI rates into account.
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 £2,286. This is calculated as follows:
((£24,000 - £12,570) x 20%)
Employee NI: £1,602.19 This is calculated as follows:
((£24,000 - £11,908) x 13.25%)
Net pay: £19,151.81 which is calculated as:
|Less tax||- £2,286.00|
|Less employee NI||- £1,602.19|
|Less net annual employee contribution||- £960.00|
|Net pay =||£19,151.81|
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:
- £960/0.6675 (20% tax + 13.25% NI) = £1,438.20.
- assuming that all of the employer NI saving is added back in, the new employer pension contribution after sacrifice is:
- £1,438.20 x 1.1505 (100% employer NI saving) = £1,654.65 pa.
On a gross salary of £22,561.80 (£24,000 - £1,438.20)
Income tax: £1,998.36 = ((£22,561.80 - £12,570) x 20%)
Employee NI: £1,411.63 = ((£22,561.80 - £11,908) x 13.25%)
Net pay £19,151.81 which is calculated as:
|Less tax||- £1,998.36|
|Less employee NI||- £1,411.63|
|Less net annual employee contribution||- Nil|
|Net pay =||£19,151.81|
|Employer NI (calculated as (£24,000 - £9,100) x 15.05%)||£2,242.45|
|Total cost to employer||£26,242.45|
|Employer NI (calculated as (£22,561.80 - £9,100 x 15.05%)||£2,026.00|
|Annual gross employer contribution||£1,654.65|
|Total cost to employer||£26,242,45|
- 'net take home pay’ stays the same before and after salary sacrifice (£19,151.81).
- there is an increased pension contribution (£1,200 pa gross employee contribution before sacrifice changes to £1,654.65 pa gross employer contribution after sacrifice).
- there is no extra cost to the employer or employee.
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.
Pensions Technical Services