Just when you thought you had the different types of pension nailed, along comes yet another bit of jargon: salary sacrifice pensions. They\u2019re essentially a way of saving into a workplace pension that reduces your official salary, but could boost your take-home pay. If this sounds perplexingly contradictory, fear not \u2013 we\u2019ve got your back. Read on to find out how they work, whether you can get one and whether a salary sacrifice pension is right for you.<\/p>
A salary sacrifice pension is a type of workplace pension that lets you \u201csacrifice\u201d part of your salary, so that your official level of pay is lower, in exchange for other benefits \u2013 in this case a pension. The portion of your salary that you\u2019ve sacrificed is instead paid into your workplace pension<\/a> by your employer.<\/p> Typically, the amount of your salary that you sacrifice is equivalent to the contributions that you would have made into your workplace pension pot in any case. Under the government\u2019s pension auto enrolment<\/a> rules, for example, this would typically be 5%.<\/p> Let\u2019s say your starting salary was \u00a330,000. Under a salary sacrifice scheme, your official salary would reduce by \u00a31,500 (5% of \u00a330,000) to \u00a328,500. Your employer would pay the \u00a31,500 you\u2019ve sacrificed into your pension pot. This would be in addition to your employer\u2019s own contribution (at least 3% of your salary under auto enrolment rules).<\/p> At first glance, paying into a pension via salary sacrifice may seem very similar to the regular way of paying into a workplace pension. But, in reality there are some crucial differences that could make salary sacrifice a better option for many people.<\/p> The percentage of your salary that is paid into a workplace pension may vary depending on the scheme, but let\u2019s stick with the standard auto enrolment percentages to keep things simple.<\/p> Under a standard auto enrolment pension, you would pay 5% of your total salary into your pension and receive tax relief on your payments. If you\u2019re a basic-rate taxpayer, tax relief<\/a> would be paid at 20%. Your employer would pay an additional 3% of the value of your salary, adding up to the total of 8% as required under auto enrolment rules.<\/p> While you don\u2019t pay income tax on the money paid from your salary into a regular workplace pension, you do pay National Insurance on your full salary. That includes any money that is then transferred into your pension.<\/p> With a salary sacrifice pension scheme, your official salary is reduced by the amount that you would have contributed under regular pension rules. The idea is that your employer then contributes the 5% you would have paid, plus its own 3%.<\/p> Because your pension contributions aren\u2019t technically coming out of your salary, as a result, you don\u2019t pay either tax or<\/strong> National Insurance on them. However, while the tax relief is automatically applied to your pension pot, this doesn\u2019t apply to the National Insurance savings. With the National Insurance savings you can either:<\/p> Yes. The calculations for this can be a bit complicated and depend on your salary, your pension contributions and how your specific salary sacrifice scheme works. This includes whether it\u2019s a simple or a SMART salary sacrifice scheme, as we\u2019ve outlined above. There are calculators online that can help, though \u2013 just search for \u201csalary sacrifice calculator\u201d.<\/p> We used one such calculator to work out the difference in National Insurance contributions and take-home pay for someone earning \u00a330,000 and paying into a pension via simple salary sacrifice vs a standard pension. For both scenarios, we\u2019ve assumed a total pension contribution of 8%. In this scenario, the amount of income tax payable is the same in both scenarios. But you\u2019d pay less National Insurance with the salary sacrifice option, resulting in about \u00a3120 more in take-home pay per year.<\/p>How does a salary sacrifice pension work?<\/h3>
Does salary sacrifice affect tax and National Insurance contributions?<\/h3>
Simple salary sacrifice vs standard pension: Difference in take-home pay<\/h4>