Salary sacrifice checklist
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.23 May 2022
One of the outcomes of a salary sacrifice arrangement can be to help generate pension contributions for employees. Many providers offer a salary sacrifice calculator to help with the calculations and Aegon has an individual salary sacrifice calculator for individual quotes and a bulk spreadsheet for multiple quotes. These offer the following quote options:
The field Convert tax and NI savings will be one of the following:
- To pension – allows an employee to maintain the same take-home pay and increase their pension contribution by sacrificing some of their salary.
- To pay – allows an employee to maintain their current pension contribution and increase their take-home pay by sacrificing some of their salary.
- Both – allows an employee to increase both their take-home pay and pension contribution by sacrificing some of their salary.
The instruction under SALTYPE with be either TYPE 1 or TYPE 2 depending on the option required:
TYPE 1: Keep pension contributions constant (KPCC) – allows an employee to maintain their current pension contribution and increase their take-home pay by sacrificing some or their salary. The employee contribution before sacrifice changes to an employer contribution after sacrifice.
TYPE 2: Keep net income constant (KNIC) – allows an employee to maintain the same take-home pay and increase their pension contribution by sacrificing some of their salary. The employee contribution before sacrifice changes to a higher employer contribution after sacrifice.
The main difference between the two options is that for the Keep net income constant option the employee national insurance saving is added to the pension contribution after sacrifice whereas for the Keep pension contributions constant option it is added to the take-home pay after sacrifice.
Putting the salary sacrifice arrangement in place involves several steps that could involve many parties including the employer, their payroll provider, their financial adviser, the employees and the pension provider chosen to administer the scheme. It’s imperative that a suitable process is followed so that the salary sacrifice is clearly documented and that the resulting contributions are correctly applied to the provider’s pension scheme. As a guide, here’s a brief checklist highlighting the main steps and issues to take account of:
Salary sacrifice isn’t an easy concept to get to grips with. However, adopting and following a set process when introducing a salary sacrifice arrangement should help ensure that it is implemented correctly with the benefits (and possible implications) of doing so being clear to both employers and employees.
Pensions Technical Services