Salary sacrifice

You can potentially boost your pension funding through “salary sacrifice”, with the co-operation of your employer.

 

What is Salary sacrifice?

In the context of retirement planning, “salary sacrifice” (also sometimes known as “salary waiver”) is a contractual agreement to waive all or part of your salary in return for some form of non-cash benefit. There’s no value in making a salary sacrifice if the alternative benefit provided is itself taxable, but there are positive financial implications if the benefit is free of tax and/or National Insurance Contributions (NICs).

It may be possible for you to renegotiate your remuneration package with your employer, allowing you to sacrifice an element of your salary in exchange for your employer contributing directly into your plan (including a or ).

 

How does it work?

• For salary sacrifice to be effective, the portion of salary must be ‘given up’ before it is subject to tax or NICs. This allows you to save the entire amount of your sacrificed income in your pension plan free of tax and NICs.
• Salary sacrifices also result in savings for your employer, as they do not have to pay NICs on your sacrificed income. If your employer passes some or all of these savings on to you, you will also benefit from an increased contribution at no extra cost
• For these reasons, salary sacrifice can significantly enhance the long-term value of your pension plan, as well as allowing you to enjoy considerable savings
• In addition, with the various NIC and tax changes that took effect from 6 April 2009 (i.e. the significant rise in the NICs upper earnings limit; the reduction in the personal allowance for individuals with gross income (before the personal allowance) of over £100,000 from April 2010; and employee and employer NIC rates having increased by 0.5%), salary sacrifice pension arrangements should become even more attractive for some
• However, salary sacrifice may not be appropriate for individuals with total income of £150,000 or more in any tax year from 2007/08 onwards, as – in accordance with new pensions tax relief regulations for high earners – any amount of employment income foregone by salary sacrifice in return for an equivalent pension contribution, where the agreement was put in place on or after 22 April 2009, will be considered relevant income and could result in the application of a “special annual allowance charge” that reduces the tax relief available
  
• Salary sacrifice arrangements entered into prior to 22 April 2009 will continue to have the effect of reducing an individual’s income for the high earner test. However, the extra amounts contributed as a result of the sacrifice will still be subject to the special annual allowance charge if an employee’s income, despite the sacrifice, remains above £150,000.

 

If you are a high earner we would recommend that you seek independent financial advice before entering into a new salary sacrifice arrangement established after 22 April 2009 as this could cause you to suffer a special annual allowance charge.

 

What you need to consider

Salary sacrifice does, however, reduce your basic salary, which could have other implications for you and your finances.

 

So before entering a salary sacrifice arrangement, you should consider the effect that a reduction in your pay may have on your salary-related entitlements, such as:

• Pay rises
• Primary pension provision
• Bonuses
• Death in service multiples.

- and negotiate the potential impact of these factors with your employer.

 

Additionally, you should be aware that a reduction in basic salary may affect your credit opportunities – such as mortgages and loans – and influence your state-related provisions and benefits, such as:

 

• Entitlement to Working Tax Credit (WTC) or Child Tax Credit (CTC)
• Entitlement to or other benefits such as Statutory Maternity Pay (SMP).

 

If you’ve already built up a significant pension fund, you should also ensure that increasing your pension contributions in this way doesn’t result in your benefits exceeding the and take appropriate specialist advice where necessary.