Salary Sacrifices can offer you a whole range of benefits, from child care vouchers to company cars. One of the most useful benefits is additional pension contributions from your employer. But is it worth it? Read on to find out whether salary sacrifice pensions are better than other ways of paying towards your retirement.
What is a salary sacrifice?
- company cars
- childcare vouchers
- work-related training
- cycle to work schemes
- car parking near your workplace
- additional employer pension contributions
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Salary sacrifice is an alternative way of saving into a pension.
According to the Pensions Advisory Service website, salary sacrifice is a way to save and reduce your income tax and National Insurance.
PAS says: “Your employer may offer you the option of salary sacrifice as part of their pension scheme.
“If so, you can give up part of your salary (your sacrifice), which your employer then pays into your pension, along with their contribution to the scheme.
“As you’re effectively earning a lower salary, both you and your employer pay lower National Insurance Contributions (NICs).
“Better still, your employer may pay part or all of their NIC saving to your pension too (although they don’t have to do this).”
How does it work?
As Employee Benefits website explains: “Instead of a pension scheme member agreeing to pay, say, £50 of their salary direct to their pension scheme provider, they agree with their employer that their pay is contractually reduced by £50 per month, and that the employer makes this contribution to the pension scheme in addition to any contribution that the employee makes.
“If an employee earns £30,000 per year and sacrifices £1,000 per month, their salary will be £29,000, which is the amount that is then subject to tax and national insurance (NI).
“Without salary sacrifice, a member contribution of £100 would be subject to 13.8% employer NI.”
Dale Critchley, pensions technical manager at Friends Life, says the scheme simply makes pension contributions more affordable for both staff and employers.
He added: “Employers save 13.8% through salary sacrifice compared to regular pensions contributions; it’s cheaper for everyone.”
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Is a salary sacrifice the best way to make pension contributions?
If you sign up for a salary sacrifice scheme, you will be paying lower National Insurance Contributions – although this is because technically you are on a lower salary.
Pensionsadvice.org.uk says: “You may also benefit from more pension contributions from your employer, if they are giving you some or all the money they are saving on NICs.”
It is a cost effective way of saving for your retirement, but there are some downsides too.
There is no number one way to save for your retirement.
To decide whether salary sacrifice is right for you, you must weigh the benefits against the costs.
What are the negatives of salary sacrifice?
Pensionsadvice.org.uk lists four disadvantages of salary sacrifice:
- If your employer is providing you with life cover, this is usually worked out as a multiple of your salary. Your employer may provide less life cover if you sacrifice some of your salary.
- If you are in a Defined Benefit scheme and you leave the scheme in the first two years, then you may not be able to receive a refund of your contributions as any salary sacrifice contributions would count as employer contributions (this also applies to trust based Defined Contribution scheme membership started on or after 1 October 2015.)
- Your lower salary may affect the amount of money you are able to borrow for a mortgage. Mortgage lenders usually calculate how much you can borrow as a multiple of your salary, although your employer may agree to state your original salary when they supply a mortgage reference.
- Your entitlement to certain State benefits, such as Statutory Maternity Pay (SMP) may be affected. Your employer should be able to tell you whether or not you will be affected in this way.
Who can set up a salary sacrifice?
As an employer you can set up a salary sacrifice arrangement by changing the terms of your employee’s employment contract, says Gov.uk.
The contact change needs to be agreed on both sides.
You can use salary sacrifice if you earn a low salary, but the arrangement must not reduce your earnings below the National Minimum Wage rates.
According to Gov.uk, employers must put procedures in place to cap salary sacrifice deduction and ensure National Minimum Wage rates are maintained.
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