Salary sacrifice - the basics
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.09 January 2020 Back to results
Salary sacrifice reworks an employee’s remuneration in a more tax efficient manner at no additional cost to the employee or employer but can help generate higher pension contributions or higher take-home pay as a result.
- pay National Insurance (NI) contributions on salary and bonuses.
- do not pay NI on pension contributions.
Salary sacrifice replaces:
- NI inefficient payments such as salary and bonus with NI efficient payments such as employer pension contributions.
- An employee agrees unconditionally to give up future remuneration in exchange for a non-cash benefit such as an employer contribution.
- This is usually evidenced by an exchange of letters to formally alter the contract of employment.
- It can be used with salary and contractual bonuses. A contractual bonus is one that an employee is expected to receive if certain targets or objectives are met.
- There is no need to formally document the sacrifice of a discretionary bonus (this is a bonus that an employee isn’t expecting). An employer simply pays the equivalent amount as a pension contribution with no need for any documentation to record this.
The amount of actual salary sacrificed won’t be liable for income tax or NI contributions. This means an employee can generally either:
- boost their take-home pay and make the same pension contribution to their pension plan (the ‘KEEP PENSION CONTRIBUTIONS CONSTANT’ option on Aegon’s online salary sacrifice calculator), or
- boost their pension contribution and keep the same amount of take-home pay (the ‘KEEP NET INCOME CONSTANT’ option on Aegon’s online salary sacrifice calculator).
The employer can further increase the pension contribution for employees, at no extra cost, by passing on some or all of their (13.8%) NI saving to the individuals’ plan, but this is purely at the employer’s discretion.
Our calculators ask 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.
Salary sacrifice isn’t suitable for everyone. You should think about:
- the impact on any other benefits that are linked to salary, for example death benefits or overtime although it’s still possible for the employer to use a ‘notional’ or pre-sacrifice salary for these benefits.
- mortgage lending that may be linked to actual salary received.
- statutory benefits which may be affected by a reduction in salary, e.g. statutory maternity and paternity pay.
Following consultation, the tax and National Insurance benefits of salary sacrifice schemes have been removed from 6 April 2017, meaning they will be liable to the same tax treatment as cash income, with the following exceptions –
- Pensions (including pension advice)
- Cycle to Work
- Ultra-low emission cars
Salary sacrifice arrangements that were in place before 6 April 2017, for cars that are not classed as ultra-low emission cars, accommodation and school fees, are protected for up to four years (until 5 April 2021).
HM Revenue & Customs guidance on salary sacrifice can be found here(Opens new window).
Pensions Technical Services